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Ensuring That The Trillions Have Impact: New Global Minimum Standards For Credible Impact Investing

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The International Finance Corp (IFC) set global minimum standards for credible impact investing today at the annual meetings of the International Monetary Fund (IMF) and the World Bank Group in Bali, Indonesia by releasing a draft of its Operating Principles for Impact Management.

Impact investing, or investing with the goal of environmental and social impact in addition to financial return, is growing rapidly. The Global Impact Investing Network’s most recent estimate for the minimum size of the impact investing market doubled to $228 billion in assets under management (AUM), up from $114 billion a year earlier. Investors ranging from public pensions to private equity firms are increasingly including impact investments as part of their asset mix.

Numerous investors are using frameworks like the Sustainable Development Goals (SDGs) to analyze how their investments link to their environmental and social goals, and numerous standard-setting organizations are working to measure and compare corporate and investor performance on their own definitions of impact. Multiple frameworks and definitions, even when each is thoughtfully developed, naturally creates confusion.

Further confounding aspiring impact investors, the line between impact investing and the rest of broader sustainable and responsible investing market is blurry. At over a quarter of global managed assets, investments in accordance with environmental, social and governance (ESG) principles have 100 times the AUM of the impact investing market and are growing 17% per year. It has been a challenge to demarcate the 1% from the 99%.

A Line In the Sand

To increase clarity for investors, the IFC has been working with a range of asset owners, asset managers, and industry associations to develop market consensus around how institutional investors should manage impact investments. Organizations that commented on the Principles ranged from Overseas Private Investment Corporation (OPIC), the US government’s development finance institution, to the Rise Fund, an impact fund led by private equity firm TPG.

The comment period for “Investing for Impact: Operating Principles for Impact Management” is open, so a range of stakeholders can still opine.   The nine principles for institutional investors focused on impact investing are described below.

(i) Define strategic impact objectives for the portfolio or fund to achieve positive and measurable environmental and social goals, in alignment with the SDGs or other broadly accepted goals. Ensure consistency between the investment strategy and impact goals and proportionality between the assets under management and the magnitude of the impact.

(ii) Manage strategic impact and financial returns at the portfolio level, recognizing that impact may vary across individual investments. Consider aligning staff compensation with achieving impact and financial returns.

(iii) Establish the investor’s contribution to the achievement of impact through a credible, transparent, evidence-based narrative. 

(iv) Assess and try to quantify the expected impact of each investment in advance, assess the likelihood of achieving the intended impact, and identify risk factors. The measurement framework should describe the intended impact, who experiences the impact, and how significant the impact is. Indicators should ideally conform with industry standards.

(v) Assess, address, monitor, and manage the potential negative effects of each investment. This may involve engaging with and providing support to investees.

 (vi) Use the results of the framework (described in Principle iv) to monitor the progress of each investment in achieving impact against expectations and respond appropriately. The predefined monitoring process will outline data collection and reporting processes, data collection frequency, and to whom data will be reported.

(vii) Consider the effects that the timing, structure, and process of exits will have on the sustainability of the impact. 

(viii) Review, document, and improve decisions and processes based on the achievement or shortfall of impact and lessons learned.

(ix) Publicly disclose alignment with the Principles annually and publicly disclose regular independent verification of the extent of alignment. The conclusions of the verification report will be subject to fiduciary and regulatory concerns.

Standing on the Shoulders of Giants

The Operating Principles for Impact Management are part of a broader trend to harmonize private sector efforts to drive positive social and environment outcomes.

The Principles complement the Impact Management Project’s framework for analyzing impact. The Impact Management Project is a network of 2,000 practitioners focused on creating shared norms for measuring, managing, and reporting impact.

The Principles also follow from the Equator Principles, a risk management framework for determining, assessing, and managing environmental and social risks in project finance that were formally launched in 2003 and are periodically updated.  The Operating Principles for Impact Management also dovetail with the Task Force on Climate-Related Financial Disclosure (TCFD) recommendations on what types of financial disclosure help investors ascertain and respond to climate change risk.

Lastly, the Principles build on the growing importance of social issues to investment decisions globally. The rise of gender investing is one example. Shareholder resolutions at opioid manufacturers and distributors in the US and large US investors weighing in on gun violence are others.

A Day to Celebrate

As Leapfrog Founder and CEO Andy Kuper explained at the panel discussion that celebrated the release of the Principles, today is a day to celebrate.  Having a set of principles that defines a minimum global standard that every investor has to meet to be credible is critical to prevent “impact washing,” or the use of impact positioning to raise capital without any social or environmental benefit.  Kuper reflected on the fact that a minimum global standard for impact investors was inconceivable a decade ago. Indeed, as impact investors move from billions to trillions of AUM, armed with the Principles, together we can ensure that the trillions have impact.

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