As the impact investing market continues to grow and mature, efforts to rate and benchmark investors are gaining momentum, guided by established standards and best practices within sustainable finance and impact investing.
BlueMark’s 2024 launch of the Fund ID is an example of one such effort to generate impact ratings, which are designed to streamline how asset allocators evaluate fund managers’ impact processes and performance.
Given the urgency of today’s social and environmental challenges, it may seem counterintuitive to create additional hurdles or expectations for those asset managers striving to create impact. However, initiatives like BlueMark’s Fund ID, while potentially intimidating at first, are best viewed as a tool for continuous improvement and refinement.
The Fund ID ratings system works by providing actionable insights and recommendations that help investors identify strengths and areas for growth. By embracing such tools, investors can demonstrate their commitment to accountability and transparency, ultimately driving meaningful progress toward their impact goals while building trust with important stakeholders.
This article explores the key benefits of undergoing an impact rating assessment and highlights how investors can stay mindful of what is realistic and actionable based on their impact objectives.
Align your timing to your goals
Asset managers have much to gain by undertaking a ratings exercise early on in a fund’s lifecycle, especially if they’re still refining aspects of the strategy or impact management and measurement (IMM) framework before entering the market. The Fund ID is designed as a fund-level assessment of impact credentials, the alignment of a fund’s approach to impact with market best practices. Upon completion of each assessment, investors receive a report with recommendations on how they can improve their approach to impact. Implementing these recommendations could make a fund manager stand out for adopting best practice impact management and measurement and thus, more appealing to allocators looking for a higher degree of expertise and credibility.
There are also advantages for asset managers undertaking a Fund ID assessment after capital has been deployed. For instance, a manager may want an outside opinion on their impact reporting to show external stakeholders – primarily LPs – that the information included is complete, accurate, and reliable. Just as no traditional fund manager would present financial performance that hasn’t been properly audited, an impact fund manager should hold their impact performance to a similar standard. Each Fund ID assessment therefore includes an impact reporting diagnostic that can be used by managers to optimize their reporting practices.
Prioritize progress over perfection
Since BlueMark was founded in 2020, we have verified more than 190 investors across a variety of types, sizes and strategies, and the vast majority still have room to grow across several key practice areas.
For example, according to our 2024 “Making the Mark” report, only 35% of investors verified by BlueMark actively solicit data from end stakeholders (for example, workers, customers, community members) affected by the investment strategy. Collecting stakeholder data is widely known to help investors understand the true effects of their investment, yet this is still considered an advanced practice that is not necessarily practical for all impact investors.
Other practices that would seem like prerequisites for operating as an impact investor–such as aligning goals with widely accepted impact standards (93%) or having a process to identify and manage ESG risks (83%)–also reveal that some investors struggle with “the basics” of impact investing.
The varying degrees of alignment with best practices helps explain why only 20 BlueMark clients have qualified for the BlueMark Practice Leaderboard, which recognizes those with best-in-class impact management practices and serves as a catalyst for advancing the impact investing industry. Earning a place on the Leaderboard may be a laudable goal for many impact investors, but such a recognition requires continuous progress and self-reflection.
Focus on delivering impact
It’s inevitable that some investors are going to be able to progress more quickly than others when it comes to implementing industry best practices, depending on their resources, investment horizon, and strategy.
Some investors may determine that the ROI for implementing certain changes does not justify the required time or resource allocation, and this may be a valid strategic choice. It is far more valuable for investors to have a clear understanding of their strengths and weaknesses—and to be transparent about these with external stakeholders—than to focus excessively on practices that may have limited relevance to decision-making or impact delivery.
Moreover, it is crucial for investors to recognize the potential risks of pursuing perfection at all costs, as this can divert attention and resources away from more impactful priorities. For example, there has been a groundswell of interest in the concept of impact-linked incentives–in effect, aligning financial incentives to the achievement of specific impact outcomes.
For many in the impact investing community, aligning incentives is considered a best practice that shows an investor’s commitment to impact. However, designing such incentive systems effectively can prove difficult and may not be right for all firms. An asset manager may make the mistake of implementing certain incentives before it is clear which impact KPIs are relevant and sufficiently ambitious, let alone achievable. In many cases, it is more prudent for the manager to wait several years into the holding period, by which time there is likely to be greater clarity on the most appropriate impact objectives, goals, and targets.
Avoid inflating impact
We see a similar counterproductive scenario in how many asset managers approach impact reporting. Many managers have a tendency to approach impact reporting as a marketing exercise, resulting in reports that attempt to serve as catch-alls, covering every activity related to impact without a clear underlying objective or strategy. This approach to reporting often ends up masking which information is actually relevant to decision-making and is therefore most appropriate for external analysis of impact performance. Asset managers, eager to show off how intentionally they think about impact, risk doing the exact opposite.
Impact ratings and similar evaluation tools can be used to align practices with industry standards, but investors need to be mindful about what’s realistic and actionable – and be transparent about their relative strengths and weaknesses in delivering impact. By engaging in these independent assessments and learning from expert feedback, investors can build trust with stakeholders and help move the entire impact investing industry toward greater effectiveness and credibility.