How important is impact assurance to drive accountability? Does it really bring added value for optimising impact? Can its cost be a barrier? Let's find out -- in our fourth edition of the Burning Topics series!
Organisations engage with independent third parties to assess impact practices and performance to assure them. Impact assurance allows investors to check their impact on investees (investor level) and the impact of their investees on beneficiaries (investee level). Demand for impact assurance is on the rise, partially thanks to the adherence of investors for impact to high-level principles and standards that require assurance. There is also a growing interest in this subject from companies and investors.
However, some investors are still reluctant to start such a journey as key questions remain unclear: how important is impact assurance to drive accountability? Does it really bring added value for optimising impact? Can its cost be a barrier?
First, we need to break down the concept and distinguish between practice assurance and performance assurance. Practice assurance looks at whether an organisation has gone through the necessary steps to appropriately manage its impact; performance assurance looks at whether the impact achieved is up to certain standards.
To date, there is more demand for practice assurance because this type enables practitioners to check the robustness of the IMM methodology and benchmark it against the methodologies of other leading organisations. Investors can also become signatories of high-level principles, such as the Operating Principles for Impact Management, or use the guidelines provided by the SDG Impact Standards.
On the other side, performance assurance is more complex since it implies a strong subjective component. Subjectivity is present when looking at the quality of impact data and outcomes achieved, thus is also linked with verifying impact through feedback from stakeholders and final beneficiaries.
Impact assurance is a key mechanism to avoid impact washing and ensure accountability to the different stakeholders investors and investees engage with, since it backs up impact claims through independent verification.
Investors for impact give high value to the learning component of impact assurance. Unlike financial auditing, impact verification not only verifies the reliability of the claims and statements of an organisation, but also serves as a learning and improvement tool for both investors and investees.
The primary objective of impact assurance is to maximise the impact of investors and investees, by improving their impact management practices. Thus, the assurance process and the nature of data needed largely differ from financial auditing.
The impact ecosystem faces some barriers that prevent further establishing impact assurance as a driver of impact accountability and learning.
IMM expertise: It is crucial that assurers have expertise in IMM to safeguard the learning component and the added value of assurance.
Harmonised standards: We should strive for a common assurance methodology that guarantees consistency and transparency. It is crucial that investors for impact help develop a harmonised set of impact assurance standards that will drive both accountability and learning. Otherwise, a huge variety of methodologies to assess impact practices may create an unintended incentive to look for the intermediary that assigns the highest scores, as it happened in the ESG market.
Resources: Some experts argue that impact assurance is as important as financial auditing, and therefore investors should dedicate the same amount of financial and human resources to it. In practice, if impact assurance becomes a service only accessible to those investors managing large pools of money, there is a risk that small investors genuinely interested in learning and improving their practices are left behind.
The Time for Impact assurance Has Arrived – Ben Carpenter, CEO, Social Value International
Ben Carpenter oversees the strategic direction Social Value International and leads technical facilitation across a broad range of collaborating organisations. Ben is dedicated to reducing inequality and improving the well-being of people and the planet. He is honoured to be leading the global network of inspirational people changing the way the world accounts for value.
Financial accounting and reporting are designed to inform decision makers about whether to invest and how to allocate resources to maximise financial returns. Assurance and audit are important mechanisms to ensure that the accounts are complete and reasonable or to use accounting language ‘true and fair.’ This builds trust and accountability, and reduces risk when making decisions.
Can we translate the above to social impact accounting and reporting? Are impact reports designed to inform decision makers about whether to invest and how to allocate resources to maximise social returns? Very rarely. Do social impact reports have assurance to ensure the information is complete, fair and reasonable? Even rarer still. And so, without these mechanisms for building trust and accountability, impact-led decision making is filled with risk. My suspicion is that impact reports rarely inform decision making. Let’s be real: most impact reports exist primarily as marketing documents.
This may sound harsh. It is not meant as a criticism of the people who produce impact reports, but it is a reality that without assurance, or a similar mechanism, human beings will naturally seek and find data that supports their interpretation of the world. This cognitive bias is rife in impact measurement; it is why most impact reports present a story of impact that is positively skewed and incomplete.
If impact reports were really designed to support decision making about maximising social impact, they would read quite differently. They would include more negative impacts (being more complete); they would include risks of using the data; and they would reveal where more positive impact should have been made with the resources available. This honesty and level of accountability to maximising social impact doesn’t currently exist. It will only exist when impact reports carry assurance statements for readers that confirm whether the information is complete, fair and reasonable.
What can we do? Replacing impact measurement with impact management has emphasised actual decision making. This has led to more interest and acknowledgement of the importance of assurance. The IFC operating principles include verification, and the UNDP SDG Impact Standards have an assurance framework. Verification and assurance are being discussed within the impact ecosystem more than ever.
With impact washing at an all-time high, I sincerely hope that the time for impact assurance has arrived. The most common resistance is that assurance is too costly and resource-intensive. We can get over this hurdle by designing verification and assurance that is proportionate. We must also reverse the psychology associated with assurance. Rather than seeing it as a negative thing that “tells you where you’re wrong,” it should be encouraged as a useful learning experience that “tells you how to improve.” If we are serious about managing impact, we must embrace assurance.
Social Value International have a suite of assurance and accreditation services and are working closely with UNDP to implement the assurance framework for the SDG Impact Standards.
The Importance of Transparency and Independent Verification in Impact Investing – Diane Carol Damskey, Head of Secretariat, Operating Principles for Impact Management
Diane Carol Damskey is head of secretariat of the Operating Principles for Impact Management. Signatories to these principles now number more than 100 institutional investors, asset managers and development finance institutions across 30+ countries.
As we were developing the Operating Principles for Impact Management (the Impact Principles), a key objective was to bring transparency to the market and invoke a rigor to be followed by all impact investors. It was well-known at the time that there was no guidance on what was required to invest for impact, and this lack of clarity had increased the risk of impact washing. The Global Impact Investing Network’s 2018 Roadmap called for a set of clear principles and practice standards to address this, and IFC took the lead in developing a standard for impact investors. The Impact Principles were launched in April 2019.
The Impact Principles clearly lay out the framework required to ensure that investors incorporate impact throughout the life of an investment. Principles 1 through 8 provide the foundation for an impact management system. Impact investors must target an intentional impact, describe how the capital invested will contribute to the impact achieved, and then monitor, measure and manage the impact.
But more was needed to instill discipline and transparency in impact investing and mitigate the risk of impact washing. This brings us to Principle 9: “Publicly disclose alignment with the Impact Principles and provide regular independent verification of the alignment.” Principle 9 is the cornerstone of the Impact Principles. It requires the publication of an annual disclosure statement by each Signatory in which they describe how their impact management systems and processes align with each principle. In addition to this annual self-disclosure, there must be independent verification affirming this alignment. In this way, stakeholders attained assurance that Signatories would uphold the standard.
The independent (not necessarily 3rd party) verification may be performed by a variety of types of organisations. Consulting firms, auditing firms and internal audit departments are the most common.
However, there are many small or new funds for which the cost of independent verification may overburden limited resources. For this reason, Signatories may create a verification committee comprised of 3 or more qualified individuals that are independent of operations and the investment decision process.
The Principle 9 requirements have contributed to a tremendous increase in transparency in the impact investing market. Independent verifications provide stakeholders assurance of the discipline and rigor that Signatories have committed to for managing their impact portfolios. The disclosures and verifications provide the market with the ability to compare across impact investors and impact investments. Signatories have also found it beneficial, as it helps them identify areas to develop to support the growth of their impact portfolios. The disclosure statement process allows them to take a fresh look at how they manage for impact and see the strengths of their systems and also where there is room for improvement. These are among the best practices that Signatories are committed to and key to the growth of the impact market in a disciplined and transparent manner.
Perspectives from signatories of the Operating Principles for Impact Management
Finance in Motion – Sarah Hessel, Senior Manager, Impact & Sustainability
Our impact management approach is constantly evolving. Having introduced a number of new processes over the last years in line with emerging industry standards, the verification was helpful in validating our approach. It also provided valuable insights into current market trends. This and the discussions with the verifier (BlueMark) allowed us to identify areas to further deepen our practices. For example, we have been refining our approach to review impact achieved for debt investments to further increase alignment with Principle 7 – Impact at Exit. Also, we found that the verifier’s structured benchmarking approach supports transparency in the impact investing market which ultimately also supports us in building credibility towards our investors.
Incofin Investment Management – Gaëlle Guignard, Risk & ESG Officer
The independent verification of our impact management systems’ alignment with the OPIM was conducted by EY, who is also our internal auditor. We found the process quite straightforward and didn’t face any particular issue with the requested information and documentation. The process took approximately 2 months, which was quick and efficient. EY did not have any major comment on our procedures and was happy with our work. Such independent verification will be conducted every 3 years, unless there is a significant change to our impact management systems.
This post first appeared as a LinkedIn article.