Advisory

Impact Investing: Verification under the Operating Principles for Impact Management

Embedding impact is a challenge and so is its verification. There has been limited guidance on it in the market. To address this challenge, the International Finance Corporation (IFC) launched the Operating Principles for Impact Management (the Impact Principles) in April 2019.

What are the Impact Principles?

The Impact Principles provide a framework of leading market practice for investors for the design and implementation of their impact management systems across the investment lifecycle.

Source: https://www.impactprinciples.org/

The Impact Principles are not limited to specific types of impact investors, sectors, geographies or asset types but are widely applicable and can be adopted for specific funds or vehicles or the portfolio. There are currently more than 150 signatories from more than 35 countries with AUM exceeding $450 million.

Why are the Impact Principles important?

Investors new to impact can use it as the start of their impact journey to design their systems and processes and investors that are already operating in impact can use it to benchmark their practice and look for areas of improvement.

The Impact Principles provide a structure for embedding impact. Each principle has action points and associated guidance, found here.

Becoming a signatory and undergoing verification

An organisation must first submit a Signatory Letter confirming its adoption of the Impact Principles. Within 12 months and annually thereafter, signatories must produce a Disclosure Statement in a standardised format describing their alignment with the Impact Principles. The Disclosure Statement is published on the Impact Principles as well as the signatories’ website.

Alongside the Disclosure Statement the alignment of the impact management systems and processes with the Impact Principles must be independently verified. The frequency of verification is not mandated by the Impact Principles, instead signatories must disclose the frequency of verification along with the reason for their choice.

GEFI’s verification for SIS Ventures

Principle 9 of the Impact Principles requires signatory investors to “[p]ublicly disclose alignment with the Impact Principles and provide independent verification of the alignment”.

In accordance with Principle 9, GEFI has recently completed the verification of the impact management systems and processes for SIS Ventures.  Formed in 2018, SIS Ventures is a part of the Social Investment Scotland Group, a leading Scottish impact investor. SIS Ventures’ aim is to support and grow high impact organisations through access to mission-aligned investment and it became a signatory of the Impact Principles in July 2021.

GEFI reviewed and documented SIS Ventures’ impact management systems and processes in line with each of the Impact Principles in turn. This was done through interviews with staff and review of key documentation. GEFI produced the verification statement and provided SIS Ventures with recommendations on how its impact management systems and processes could be further developed.

Next step for verification methodology

As an independent verifier, GEFI developed its own methodology to complete the verification.

Tideline, an impact investing consultant, has produced a report on investor alignment with the Impact Principles which includes verification methodology and scoring.

Verifiers developing their own verification methodology has both pros and cons. On one hand, innovation and experimentation are needed in this relatively new field. On the other, there is a risk that different methodologies may end up undermining the integrity of the verification process.

Moving forward, the Impact Principles may benefit from releasing methodology guidance and checklists for verifiers to ensure that verifications are completed in a standardised or similar way.

SIS Ventures quote

“As signatories to the Operating Principles for Impact Management we need to work with external experts to satisfy the requirements of Principle 9. The team at Global Ethical Finance Initiative were methodical and robust in their verification approach, whilst also highly professional and approachable. The team also provided us with a useful short report on how we could further improve our impact processes and this will help inform our future practice. I would confidently recommend GEFI’s services in this area to others.” Lindsay Wake, Head of Impact, Social Investment Scotland.

Please join us in Edinburgh on 6 September 2022 for our annual ethical finance summit, “ESG in a Volatile World – Profit, Purpose or Politics?”

by Sam