Beats | April 21, 2020

‘Operating principles’ help investors hold asset managers accountable for impact

Dennis Price
ImpactAlpha Editor

Dennis Price

ImpactAlpha, Apr. 21 – A set of ‘operating principles’ for impact investing may help investors distinguish between “impact” funds and… everything else. 

Case in point: When BlackRock last week launched the BlackRock Global Impact Fund, it said it would align the fund with the Operating Principles for Impact Management that were launched last year by the International Finance Corp., the private-sector investment arm of the World Bank. The actively managed public equities fund will take stakes in public companies that generate a majority of revenues from activities that advance the U.N. Sustainable Development Goals.

At the same time, BlackRock quietly removed the “impact” label from three other public-equity sustainable investments funds. Instead, the asset management giant re-categorized the products as “ESG” funds. That label suggests a less proactive approach to advancing social impact while still reducing exposure to companies with social, environmental and governance risks, such as producers of controversial weapons, tobacco, tar sands oil and coal.

In a note to shareholders this month, the BlackRock said the renaming of the “BlackRock Impact World Equity Fund” to “BlackRock Systematic ESG World Equity Fund” reflects the firm’s new categorization of ESG products since the fund was launched in 2015. That fund will no longer describe its process for selecting assets as seeking “measurable positive societal impact.” Instead, the fund will use “systematic ESG methodology” in selecting assets (Editor’s note: This story has been updated to reflect additional comments by BlackRock).

Significantly, BlackRock has not committed to managing the ESG funds in alignment with the nine IFC operating principles. 

Global investment firms adopt IFC principles seeking a market standard for impact investing

The linguistic reshuffle demonstrates the potential for the principles to help investors find their place in the increasingly crowded sustainable investment marketplace. The principles require signatories to establish and disclose their processes to manage their impact investments – from due diligence through portfolio management to exits and acquisitions. 

That means large asset managers like BlackRock with multiple funds and strategies must decide which funds to label “impact” and which to call “ESG.”

BlackRock is among nearly 100 asset managers and owners that have signed onto the IFC operating principles. The signatories range from financial services giants like UBS, Credit Suisse and Nuveen to specialized impact managers like Incofin, Blue Like an Orange and Quona Capital (the full list is here). 

“An impact label without the actions and accountability to back it up is of no value,” says Tideline’s Christina Leijonhufvud. The consultancy last year launched a verification service to certify investor alignment with the principles. Tideline’s new report, “Making the Mark,” analyzes results of 13 verifications for 11 clients representing more than $70 billion in combined impact investment assets under management.

“The combination of standard-setting and verification is what gives the market confidence that intentions are backed up by practices, outcomes are backed up by evidence and impact labels actually mean something,” Leijonhufvud says. (Tideline is sponsoring ImpactAlpha’s Agents of Impact Call No. 15 this Thursday, April 23, to discuss the verification processes and results. RSVP here.)

Standard setting

Unlike some pledges or commitments, the IFC principles have teeth. Principle No. 9 requires signatories to publicly disclose and independently verify their alignment with the principles. At least 18 of the original 60 signatories of the IFC principles have published their first annual disclosure statements (BlackRock has not yet reported). The April 15 deadline for the first disclosures was postponed to July due to the COVID pandemic.  

Tideline counts among its clients long-time impact managers including LeapFrog Investments, BlueOrchard Finance and Calvert Impact Capital. Also in the sample represented in the new report are legacy investment firms and financial institutions that have added impact offerings, such as KKR, Nuveen and UBS. 

With trust comes scale, says Leijonhufvud. Like certifications have done for organic food or ratings have done for bond markets, the IFC principles aim to boost standards and trust in the marketplace for impact investments. Verified alignment “is key to unlocking scale in impact investing because it’s been critical to unlocking scale and to the maturation of just about every product and service market that is considered mainstream,” she says.

Global investment firms adopt IFC principles seeking a market standard for impact investing

The IFC’s Neil Gregory said the operating principles will be even more valuable as the COVID-19 pandemic spurs a broader set of investors to consider the social and environmental impact of their portfolios. That welcome impulse brings with it an increased risk of “impact washing” if poorly managed investment products undermine the credibility of more rigorous practitioners. 

“This is a moment where it brings into sharp focus how impact investors think differently from normal financial investors,” Gregory told ImpactAlpha. “They’re not just thinking about ‘how do I maintain the financial performance of my portfolio,’ they’re also thinking about how to maintain the impact performance as well.”

Gregory expects to see more large asset managers sign on to the principles in order to launch “impact” products in the market. BlackRock, for example, was involved in the early design of the principles; it formally signed on to the principles as part of a package of announcements around sustainable investing in February. 

Managers of many of the multi-billion dollar private-equity impact funds that have been launched in the last 18 months have signed onto the principles including KKR, TPG Growth’s Rise Fund and Partners Group. “That’s going to provide an on ramp for the asset owners to start investing for impact,” he says.

Race to the top

The analysis from Tideline suggests impact investors are ahead of the curve on impact intentionality and measurability. All of the firms articulate impact objectives, for example, and 11 of 13 strategies use impact metrics aligned with industry standards such as the IRIS+ or the Impact Management Project’s five dimensions of impact. 

Ripe for improvement: measures to preserve impact after loans are repaid or equity positions liquidated. Only three of the 13 fund-management strategies analyzed by Tideline include consideration of the consequence for impact at exit.

Calvert Impact Capital, a nonprofit investor with $415.9 million in assets, received the highest score, “advanced,” from Tideline on impact exits (and on six of eight principles overall). The firm considers a borrower’s ability to generate impact at origination, renewal and repayment, and says it often renews or increases financing if impact performance is on target.

Among Calvert’s strengths: Impact due diligence, which it has standardized to assess expected impact for all prospective investments. An area for improvement: ESG risk management. While it assesses a standard set of ESG factors for borrowers, says Tideline, “it could consider developing a more comprehensive approach to managing and mitigating ESG risks and underperformance.” Calvert has posted its disclosure and verification on the IFC’s site, and shared Tideline’s assessment of the firm’s alignment with the Principles.

“We hope that the rest of the industry will follow suit and that we can deliver on the promise of transparency that the Principles offer,” Calvert’s Jenn Pryce told ImpactAlpha. She said she hopes the disclosures engage investors in asking questions about impact measurement and management practices at the firm.

 “We also hope it spurs them to ask the same questions about their entire portfolio.”