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  4. Episode 52: How to fight impact washing

Guest speaker:

Christina Leijonhufvud, CEO at BlueMark - a leading provider of independent impact verification services.

How to fight impact washing: using third-party expertise for impact verification

Episode 52 | Duration: 17 minutes

The IFC estimates the impact investing market at as much as $2 trillion. However, the risk posed by impact washing and the lack of standards remains one of the key challenges for this sector. Tune in the episode to learn more about fighting impact washing.

  • Keesa Schreane [00:00:01] Welcome to the Refinitiv Sustainability Perspectives podcast, where our goal is to engage and inform our audience - from investors to asset managers and portfolio managers to sustainability leaders and those involved in ESG and sustainable finance. This is Keesa Schreane.  

    Keesa Schreane [00:00:21] The impact investing industry has grown in depth and sophistication over time, but there are challenges hindering this process, such as impact washing. To discuss this with us today is Cristina Leijonhufvud CEO at BlueMark, a leading provider of independent impact verification services for investors and companies. Cristina, welcome. So before we dive deep into the public impact washing, could you please remind us of the difference between impact investing, ESG investing, and other similar concepts? What are the differences between them?  

    Cristina Leijonhufvud [00:01:03] Yeah, it's a great question and there is certainly some gray area and I think increasing overlap and convergence between the ESG movement and the impact investing movement. However, I think a shorthand way of distinguishing between investing with an ESG lens and impact investing is to think about integrating ESG factors in investment processes is really about thinking about the nature of the business operations. So the operational effects in terms of environmental, social, and governance practices and processes that you, you know, that an investor might like to see in a given business or company. Impact investing is really all about outcomes. So it's investing with a specific lens around what is the ultimate outcome that this business is contributing will better the world in some way. And and most investors these days are using the Sustainable Development Goals as a framework to ground those outcomes-based goals.  

    Keesa Schreane [00:02:16] Operations versus outcomes. So if we're talking to investors and we're very outcome-oriented, why should investors care about impact investing? What is the state of it? Let's talk about the number of assets that are in this area right now.  

    Cristina Leijonhufvud [00:02:35] Yeah, so I've been in the field really well since the genesis of the term impact investing. Of course, the seeds were sown for this movement years before the term was coined back in 2007, really by the Rockefeller Foundation and and a group of other investors. And at that time, you know, the small group that Rockefeller gathered felt that the market was showing great promise, but was still very peripheral to mainstream markets. I and my colleagues at JPMorgan at the time put out a report that forecasted the market might grow to between four hundred billion and one trillion dollars in assets over 10 years. And at the time, we honestly thought we were being extremely audacious in putting that out to the market. But it was, you know, it was a way to put the movement on the map. Today, the Global Impact Investing Network estimates that the market has grown to seven hundred and fifteen billion. So it turns out somehow we were right in terms of the range. The IFC has actually estimates the market even higher, at about two trillion dollars.  

    Keesa Schreane [00:04:03] So let's talk about the challenges that exist now. You mentioned that years ago you saw one of the challenges as this being perceived as not an actual market, but something that was more on the periphery. Does that remain a challenge? Or as we move forward and become more sophisticated, do we see other challenges? And from here, we can talk about impact watching and how that's posing a challenge as well.  

    Cristina Leijonhufvud [00:04:27] Yeah, I mean, I think in the early days, you know, I think impact investing was largely regarded as sort of a separate and distinct method of investing - again, this is a very intentional approach to seeking social and environmental impact and measuring for those outcomes. Today, it has really evolved and matured - again, I'd say in some respects, beyond my wildest dreams 10 or 15 years ago. And and now I think has has grown so much in terms of the mainstream attention and capital that's flowing into this market. When we see the likes of Blackstone and KKR and JPMorgan launching impact funds, you know that impact investing has sort of truly arrived in terms of attracting really widespread interest among asset owners, that is pushing these mainstream asset managers and intermediaries to launch funds, to respond to that client demand. So that is really exciting. With that, of course, comes the concern that you've led with, which is the concern that with at with this massive movement of mainstream capital towards impact investing, there are risks of impact washing and that that that arises from still a lack of labeling standards. Nobody actually owns the impact label. So the market has to police the use of the label itself.  

    Keesa Schreane [00:06:25] So let's talk about the impetus behind the launch of BlueMark. Tell us what need you saw that really exists in the market or what was the gap? And what is the approach of an impact verification service? What's the use case for and how are investors involved and what is the ultimate outcome?  

    Cristina Leijonhufvud [00:06:46] Yeah, well, thank you. BlueMark was launched at the beginning of this year, we launched the brand on October 1st, but the actual business was launched in January. And it really grew out of recognition by my two business partners, who we have been running a specialized impact consulting firm called Tideline for the last six, six-plus years. We recognize this kind of surging critical demand for an assurance service, an expert third party who could look under the hood in various asset managers and investor contacts and provide an independent assessment of the quality of the impact practices and the quality of impact reporting that's being conducted. So that was really the genesis of Blue Mark. It was, you know, the first kind of kernel of the idea and light bulb went off with the launch of / or the advent of the operating principles for impact management, which is a relatively new standard in the market around which many investors, 110 or so, have coalesced. It was launched by the IFC, the private sector arm of the World Bank, and 60 other signatories. And that standard to which all of these investors are signatories actually required independent verification of the signatories. So some of our existing clients at Tideline started turning to us and saying, you know, we need we need a specialist to come verify that we're aligning to this this market standard. And so that was the kernel of the idea for BlueMark. And we quickly realized we needed to set BlueMark up as an independent entity separate from our consulting business to meet this demand. But also that the range of verification services was going to grow over time, as there are various aspects of impact assurance that the market is requiring; Both on, again, practices, how an investor is conducting impact management and measurement to optimize for the impact goals they've articulated, but also the assurance of impact performance and the reporting that is done around the actual impact performance of those assets.  

    Keesa Schreane [00:09:33] And so, Cristina, you mentioned one of the risks with impact investing, being that there aren't really strong standards that are universal, that are global. Yet it sounds like this is a use case for verification. So it seems as if it would be a bit challenging to verify where there are no strict standards. How can you get beyond that huge hurdle trying to verify these positions when the standards are pretty murky?  

    Cristina Leijonhufvud [00:09:59] Yeah, it's it's a great question. And I think the good news is the standards are coming. And I think there's been a ton of progress on laying the groundwork for an effective, discrete set of standards to help this market, essentially self-governance around the use of the impact label. One of those standards, and again, a relatively new one, as I just mentioned, which is the operating principles for impact management. Another one that's coming out of the United Nations Development Program is called SDG Impact. And it's another standard around investors' practices for use of the Sustainable Development Goals and the impact label in their in their reporting and labeling of their funds. There's a ton of work going on right now by various both voluntary standard setters and regulatory groups and accounting groups on reporting and performance disclosure standards. So I am more optimistic than I've ever been that we are going to get there in the next couple of years. In the meantime, you know, clients are turning to groups like BlueMark to provide not only comfort to their LP's and other asset owners who are investing in their funds, but they're turning to BlueMark because, you know, most asset managers really want to know how they're stacking up against kind of best practice in industry standards. And and and that's still very murky to individual players that, you know, most investors truly do have positive, good intentions. They're trying to sort of articulate, very clear and transparent impact strategies and faces and back them up with robust processes and standards. No investor wants to be accused of impact washing at the end of the day and. And damage their reputation, but many of them don't quite know what best practice is. So groups like BlueMark help to sort of shed a light on how investors are benchmarking against others in the market.  

    Keesa Schreane [00:12:34] So if we look at business as an ecosystem, you have investors, you have those managers who are in the business as well as portfolio managers, investors, you have consumers, you have shareholders. What is the role of each of these members of the ecosystem in terms of preventing impact washing, as well as ensuring that these standards happen? What is the role and what's in it for them?  

    Cristina Leijonhufvud [00:13:00] Yeah, it's a great question. I think the ultimate stakeholder interests that we're looking to serve and protect with BlueMark's verification service is the ultimate asset owner. But also when we talk about asset owners, that can be a big bucket. Right. That can be an individual retail investor. That can be a high net-worth family. That can be a large, massive institutional investor that is frankly allocating assets on behalf of their shareholders or retail clients. And so it's the interests of asset owners and asset allocators that are directly served by kind of having a robust set of standards and a robust assurance process. Because if you think about it, if you're an asset owner and you're trying to construct a portfolio against a set of social or environmental objectives, there's only so much due diligence you can handle on your own, right? I mean, you can have a robust due diligence process. You can engage to some extent with asset managers. But really, you need this to be made more efficient if you're going to move large capital.  

    Cristina Leijonhufvud [00:14:20] You know, especially if you are a large pension fund or something, a CEO for a large pension fund, you need third party experts who will cut down some of the friction, create more transparency,  provide you the assurance that there are minimum standards being abided by the asset managers you're investing in. And so it really is up to the asset owners and the asset allocators to obviously do their own homework, but also to ask for, you know, these kind of third party assurances. And also to push from a policy point of view to for better standards. And I think the regulators also have a role here as well. We're seeing the regulatory regulators in Europe move in. And I think,  there's hope that in the U.S. we'll see some movement in the next few years as well.  

    Keesa Schreane [00:15:22] Great information, Christina, so we started off talking about the difference between ESG and Impact Investing, as you mentioned, the nature of business operations. ESG practices and processes. Investors want to see those things versus impact, which is the ultimate outcome in terms of impact investing. We talk about the challenges for impact investing, historically, impact investing being perceived as a separate method of investing. And today it's a lot more mainstream. But one of the primary challenges or risks would be from impact washing and really from a lack of standards. And we hope that that's all changing in terms of seeing greater standards in the future. We talked about the importance of having third party expertise to really verify alignment to market standards and how that expertise is in the interest of many in the business ecosystem, asset owners, allocators, regulators, as you brought up, and efficiency around due diligence, creating transparency and providing assurance as being a critical factor for businesses and investors. Christina Leijonhufvud, CEO at BlueMark, thank you so much for joining us.