In this podcast, Isabel Dische and Melissa Bender discuss the recent impact investing standards published by the International Finance Corporation (IFC), an arm of the World Bank. This discussion provides a high-level overview of the IFC impact investing framework and related considerations for asset owners and managers.
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Isabel Dische: Hello, and thank you for joining us today on this Ropes & Gray podcast, the latest in our series of podcasts and webinars focused on ESG and corporate social responsibility issues. I’m Isabel Dische, a partner in our asset management group based in New York and co-chair of our institutional investor practice. Joining me is Melissa Bender, a partner in our asset management group in San Francisco. We are going to be talking today about the recent impact investing standards published by the International Finance Corporation, or IFC, an arm of the World Bank. One note before we get started: today’s podcast is intended to be an overview of the IFC impact investing framework. We are not trying to convince you why you should, or should not, engage in impact investing (or even if impact investing is permitted for your clients). Nor are we advocating that you should, or should not, adhere to the IFC impact investing framework. Rather, today’s discussion is intended to provide a high-level overview of that framework and some related considerations. With that, Melissa, can you give us some background on these?
Melissa Bender: Certainly. The International Finance Corporation has established a framework consisting of nine core principles that they hope will allow investors to make better decisions in the impact investing space. These principles were developed over a fairly iterative process involving collaboration with financial institutions with expertise in managing impact-related investments and building upon existing standards and frameworks in this field. In particular, the IFC worked with the Global Impact Investing Network and the Impact Management Framework to develop the principles. The IFC impact framework is intended to describe the essential features of managing investments with the dual intentions of contributing to measurable positive social or environmental impact and achieving financial returns. It’s worth pausing here to note that this is focused on impact investing – using investment decisions to achieve a social or environmental outcome – rather than ESG investing or socially responsible investing. In ESG investing, investors incorporate environmental, social and governance risks and opportunities into their investing processes. In socially responsible investing, investors add a socially responsible overlay to their investment program, such as excluding certain investments. The IFC framework is intended to offer greater transparency and comparability in an area that has been stymied by a lack of globally accepted definitions of, and metrics for, “impact investing.”
Isabel Dische: As a first step, an asset manager must affirmatively define the portfolio’s impact objectives – for example, the targeted social or environmental outcome – and confirm those objectives are consistent with the portfolio’s investment strategy. Having set an impact strategy, the manager would then determine how to monitor and assess impact performance on a portfolio-wide basis. When evaluating new investment opportunities, an asset manager must establish the proposed investment’s contribution to achieving the portfolio’s impact objectives and also predict the expected contribution of the investment. Note that as part of this process a manager should also consider the potential negative impacts and how those can be monitored or addressed. The IFC impact framework encourages a systematic approach to a portfolio’s impact goals. In addition to monitoring financial performance, the asset manager is to monitor the progress of each investment in achieving impact performance as compared to the expectations. If a portfolio is unlikely to achieve its expected impact performance, the manager might consider active engagement with the underlying investees, early divestment, or, if circumstances merit, the manager might even reconsider the portfolio’s impact objectives themselves. While the IFC framework does not promote particular impact objectives, it is very focused on accountability and tracking, as historically there’s been a lot of criticism of “impact washing,” or otherwise designating products or strategies as impact investments when they’re not fit for that designation. This framework is intended to provide some rigor and transparency to the impact investing process.
Melissa Bender: Yes, there are both upfront and ongoing compliance requirements for IFC impact framework signatories. Similar to the mandatory reporting framework for PRI signatories, the IFC framework requires signatories to document the expected and actual impact of investment projects and to provide annual disclosure as to how the principles are implemented, with independent verification of the impact management systems engaged by these managers. Note that the process is designed to be an iterative one, with asset managers periodically reviewing, documenting and improving their decisions and processes over time. More specifically, managers commit to publicly disclose, annually, the alignment of their impact management systems with the IFC framework and to periodically arrange for verification of this alignment. This independent verification can be conducted in different ways – for example as part of a financial audit, by an independent internal impact assessment committee or through a performance evaluation. The approach to, and frequency of, such verification should reflect a cost-benefit analysis. The framework additionally urges asset managers to consider whether impact investment targets were achieved in addition to the achievement of other financial performance metrics when awarding incentive payments to their employees. All of this reporting is designed to increase credibility in the impact investing space.
Isabel Dische: Importantly, the IFC principles neither dictate how impact should be measured or reported, nor identify the types of investments that might constitute an impact investment. One has to remember that this is all intended as a starting point and the first step of many that would help a manager build transparency and trust among investors in the impact space. There have always been doubts as to whether the private investment sector has the interest and ability to close the gap between amounts funded now by asset managers and institutional investors toward impact-related investments and the IFC’s aspirational target of $26 trillion. So it is noteworthy that within the first two weeks of the framework’s publication, nearly 60 asset managers and institutional investors from around the world had signed up, including many large asset managers and financial institutions. It will be interesting to see how market participants might take these principles further in their investment activities.