Impact investors face increasing pressure to demonstrate the validity of their impact claims. It is no longer sufficient for a fund manager to offer a brief description of their impact strategy and the ways it accounts for impact within its investment processes. In addition, GPs must provide regular information about the fund’s investment activities, progress, and impact results.
Impact reports are one of the primary mechanisms used by fund managers to share impact performance and other related updates with their LPs. As the impact investing market has grown and matured, LPs have become more discerning consumers of impact reports. They increasingly expect reports that provide detailed results, as well as narratives that help them understand and interpret those results. This means moving away from “vanity metrics” that may look impressive but lack the specificity and depth needed to assess the fund’s impact performance and the manager’s contributions to those results.
In our work with both LPs and GPs, we have seen the significant disconnects surrounding the use of impact reports and the desire among LPs for more consistent and balanced reporting. We also have seen firsthand the powerful role verification can play in driving higher quality reporting.
The value of verified impact reports
Verified impact reports have the potential to bring more transparency, and ultimately more trust and confidence, to the LP-GP relationship. Further, since the verification process often highlights opportunities for GPs to enhance reporting content and data quality, verification can accelerate uptake of best practices, ultimately enabling better analysis of impact performance.
Asset managers who are out in front providing complete and reliable impact reporting stand to gain a competitive edge, demonstrating their commitment to accountability in a market still grappling with impact-washing concerns. Below are four quotes from industry leaders illustrating how verification has helped them overcome key challenges and achieve their objectives.
Demonstrate credibility and accountability
“We want our investors to know our impact reports are credible and can stand up to scrutiny.”
Rather than solely providing self-reported data, asset managers can build greater trust by having their impact data and reporting methodologies independently verified. Independent verification ensures that the accuracy of the reported data is validated and also that metrics definitions, data source citations, and assumptions are all appropriately disclosed and reviewed for clarity.
This level of transparency allows LPs to better understand the data behind the report, including whether and when it’s appropriate for the LP to aggregate certain data points and/or make comparisons between other investments in their portfolios.
“We recognize that impact reporting is an important part of how we hold ourselves accountable.”
Impact reports provide a structured medium for GPs to communicate their results and learnings to LPs. Further, there are emerging best practices for what a report should include and how the information should be presented. An independent verification can provide LPs with additional confidence about the extent to which a GP is reporting in line with these best practices and the degree to which they are appropriately using relevant impact measurement and management frameworks.
Improve the quality and effectiveness of impact reports
“This exercise was a major milestone in our ‘effectiveness’ journey. It led us to reflect on what we have achieved so far and what we can do better to reach the higher standards in the industry.”
Developing an impact report provides a valuable opportunity for GPs to engage in self-reflection, critically assessing the effectiveness of current strategies and identifying areas where improvements may be necessary in impact management and reporting processes.
Impact verification can serve as a valuable tool in facilitating the self-reflection process by providing an objective assessment of potential gaps that may hinder a manager’s ability to produce high-quality reports.
For instance, a manager lacking clear processes for establishing impact targets or goals at the time of investment will be unable to report results in relation to initial expectations. Third-party verification assists asset managers in identifying these gaps, refining their strategies, and continuously enhancing both the effectiveness of their reporting and the underlying impact management processes.
Promote communication and trust with LPs
“Clear, honest reporting enables our LPs to see exactly how their capital is driving impact. By being upfront about both achievements and challenges, we build the trust and confidence they need to continue supporting our mandate.”
A quality impact report is forthcoming about potential impact risks and past lessons learned. It acknowledges both potential and observed areas of impact risk for individual investments, and where relevant for the portfolio, as well as commentary about lessons learned by the GP in implementing its impact strategy.
By clearly communicating both successes and challenges, fund managers demonstrate their integrity and commitment to transparency. Verification can further enhance this transparency by ensuring that disclosures on risks, tradeoffs, and lessons learned are rigorous, credible, and aligned with industry best practices, strengthening investor trust and confidence.
BlueMark offers two types of reporting assessments, our Reporting Diagnostic and our Reporting Verification. The Reporting Diagnostic evaluates the alignment of your impact reporting plans and approach with industry best practices and market standards, while the Reporting Verification assesses your final report. Both services leverage BlueMark’s impact reporting research and the Impact Performance Reporting Norms. This process provides clients with tailored recommendations to effectively communicate their impact results and enhance their impact management (IM) practices.
To learn more about our impact reporting verification, please reach out at [email protected].