Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Impact investing best practice benchmark
BlueMark, an impact investment verification service provider, has launched a benchmark for tracking best practices in impact management. It is designed to root out impact washing.
The global benchmark allows market participants to differentiate between impact ‘leaders’ and ‘learners’, the US-based BlueMark said last week (May 11).
It is based on aggregated data and insights from 30 impact verifications for investors with a combined US$99 billion in impact assets under management on their alignment with the ‘Operating Principles for Impact Management’, the leading market standard for impact management practices.
Each impact verification involves conducting multiple interviews with client teams and reviewing hundreds of pages of investment policies, transaction documents, data, and reports. The full report, “Making the Mark: The Benchmark for Impact Investing Practice,” which was developed with support from The Rockefeller Foundation, is available here.
BlueMark is an independently operating subsidiary of Tideline, a US impact consulting firm which is well-known to Australian investors. Tideline is run by co-founder and a managing partner, Ben Thornley, a former investment journalist and editor in Australia. BlueMark is headed by Christina Leijonhufvud, another managing partner of Tideline.
The new benchmark includes three distinct categories that define the practices of leading, median and learning impact investors, providing a dynamic understanding of what it means to rigorously manage for impact. While the research sample analysed by BlueMark reflects impact investors that have committed to pursue alignment with the Impact Principles, there are still differences in how different investors approach impact management. These differences include:
- Practice Leaders – are in the top quartile of the sample (75th percentile and above). These standard-bearers implement all of the core elements of impact management, as well as several leading-edge practices that may go above and beyond best practices. They are also committed to further learning and improvement that helps to continually advance the bar for best practice.
- Practice Median – reflects the impact management practices of the median impact investor in the research sample (50th percentile). Investors at the Practice Median implement many of the core elements of impact management, but also have significant room for development.
- Practice Learners – are in the bottom quartile of the sample. These investors have well-articulated impact intentions, but they lack some of the core impact management practices needed to generate positive impact. Many are early in their impact investing journeys, while others have yet to embed impact considerations at key stages of the investment process.
Christina Leijonhufvud, BlueMark’s chief executive, said the idea of a benchmark was essential to the continued institutionalisation and maturation of the impact investing market. She is also the lead author of the report.
Leijonhufvud said: “By establishing a shared consensus on best practices in impact management, we have created a valuable tool that we hope market participants can use to improve their own practices and to see where they stand against their peers.”
The 30 impact verifications cover a broad range of investor types and asset classes and highlight key opportunities and challenges for practitioners. Key findings include:
- Growing consensus around the SDGs. 93 per cent of impact investors in the sample align their investments with the Sustainable Development Goals (SDGs), and 48 per cent specifically align with the 169 targets underlying the SDGs
- Alignment of incentives with impact still in early stages. 43 per cent directly align staff incentive systems with impact performance, including 17 per cent that tie annual bonuses to impact and 3 per cent that tie carry to impact
- More effort needed to systematically avoid harm. 90 per cent identify select ESG risks in their investment decisions, but only 43 per cent systematically engage investees to address ESG gaps and unexpected risks
- Impact performance needs to be more inclusive of stakeholders. 57 per cent compare actual with expected impact performance, yet just 11 per cent solicit input from key stakeholders to understand their impact performance
- Impact management is a continuously iterative process. 32 per cent monitor and review unexpected positive and negative impacts, and 30 per cent use learnings from impact performance reviews to improve investment decisions and portfolio management.
