The Importance of Transparency and Independent Verification

Quoting Diane Damskey, Head of Secretariat, in EVPA's Burning Topics series:

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.