Bhakti Mirchandani
Sustainable investing is one of the most rapidly growing parts of the market, increasing from $23trn in 2016 to $31trn last year. And impact investing is one of the most rapidly growing parts of sustainable finance, doubling each of the past two years to $502 billion in assets under management according to the Global Impact Investing Network.
As investor demand drives growing sustainable and impact investing assets under management, countless efforts are underway to prevent “green washing” and “impact washing” or the use of sustainable and impact positioning to raise capital without any environmental or social benefit. A fledgling—but important—one is sustainability and impact assurance, which enables informed scrutiny by third parties and independent verification. This article highlights three trailblazers: Vornado Realty, Etsy Corporation, and LeapFrog Investments.
Sustainable investing. There are over 600 environmental, social, and governance (ESG) frameworks globally. Two of the most widely accepted among investors are the Sustainability Accounting Standards Board (SASB) industry-specific standards, developed based on extensive feedback from companies, investors, and other market participants as part of a transparent, publicly-documented process and the Global Reporting Initiative (GRI) sustainability reporting framework. SASB’s Investor Advisory Group consists of investors with $34 trillion in AUM who are committed to improving the quality and comparability of sustainability-related disclosure to investors. Similarly, GRI reports are produced in 100 countries and recommended by regulators as a way to meet sustainability reporting requirements in Taiwan and Denmark.
Impact investing. Impact investing is the pointy end of the spear in sustainable finance, since it requires that an investor intentionally generate positive social outcomes in addition to financial returns. In April, after collaborating with leading asset managers, asset owners, and development banks for over a year, the International Finance Corporation (IFC) launched the Operating Principles for Impact Management, which offers investors clarity and consistency on what constitutes impact investing. The Operating Principles for Impact Management launched with 60 investors with an aggregate $350 billion in impact assets under management—70% of total global impact AUM—committing to manage their current and future impact investments according to the Operating Principles for Impact Management. This commitment entails integrating impact considerations across the investment lifecycle: strategy; origination and structuring; portfolio management and exit. Importantly, this commitment also includes annual disclosure and independent verification on how signatories implement the principles.
An Etsy Bitsy, But Important, Step Forward With Sustainability Assurance And Reporting
In February, the global marketplace for unique and creative goods Etsy, Inc. pushed the frontiers of sustainability assurance and reporting in its fiscal year-end filing, Securities and Exchange Commission (SEC) Form 10-K. Etsy prepared a detailed sustainability report based on SASB standards, engaged its auditor PwC to provide a review report on its sustainability report, included its sustainability report in its 10-K, and referred readers to its investor relations website, which includes PwC’s name and a copy of the review report. The 10-K also included language about commissioning a third party to attest procedures on its carbon and energy metrics, perhaps in attempt to limit Etsy’s Securities Act disclosure liability exposure. PwC’s review report provided limited assurance on Etsy’s ESG report.
Exhibiting Creativity Around Sustainability Assurance And Reporting
In April, Vornado Realty, a $13 billion market cap REIT, became both the first company to report on sustainability through a current report on Securities and Exchange Commission (SEC) Form 8-K and the first company to include an examination report of ESG topics in an SEC filing. Vornado attached a press release, a copy of its 2018 ESG report—which included detailed GRI and SASB reports—and respective review and examination reports from its auditor Deloitte & Touche as exhibits. By way of background, Form 8-K must be filed within four days of significant events, like changes in control, and it also allows companies to broadly distribute information to investors. The SEC allows Form 8-K Item 7.01 exhibits, such as Vornado’s ESG report, to be deemed “furnished” rather than “filed.” Information an 8-K that is “furnished” rather than “filed” is not subject to Securities Act disclosure liability. Thus, Vornado’s 8-K filing approach is a creative way to avoid this liability and to allow Vornado to report on sustainability without the time pressures of the quarterly financial reporting process. And an examination report provides a higher level of assurance than a review report.
By preparing GRI and SASB reporting, engaging their auditors to review and examine them, and including their SASB and GRI reports in SEC filings, Etsy and Vornado stand out in a sea of many companies publishing sustainability reports that cover a wide range of sustainability topics on a standalone basis with varying usefulness to investors.
Leapfrogging The Competition To Assure Impact
In September, LeapFrog Investments became the first impact investor globally to conduct an independent audit of impact against the Operating Principles for Impact Management. LeapFrog is a specialist growth capital private equity investor in Africa and Asia that is focused on the 4 billion emerging consumer opportunity in financial services and healthcare. Founded in 2008 and investing its of $743 million third fund, LeapFrog is invested in 26 companies that reach 188 million people with healthcare or financial services, across 35 countries. 155 million of those individuals are emerging consumers in Africa and Asia, living on less than $10 per day per person in the household, purchasing power parity adjusted.
In the independent audit by leading US impact consultant Tideline, LeapFrog was deemed an “exemplification of industry best practice,” with its impact measurement and management system assessed as reaching “an advanced level of alignment across the board for all nine of the [Operating] Principles [for Impact Management].”
Tideline observed that LeapFrog has finetuned its impact measurement and management system over the course of its four funds. Looking under the hood, LeapFrog’s proprietary measurement and management framework encompasses financial, impact, innovation and risk management factors. Across the investment cycle, LeapFrog’s framework incorporates financial and operational key performance indicators and governance indices it benchmarks to best practice globally. The impact audit highlights LeapFrog’s strength in integrating impact considerations consistently across the investment process, including clear protocols and standardized reporting.
Following the impact audit, LeapFrog intends to further formalize its framework for considering customers and employees, as well as shareholders, prior to selling a portfolio company.
Vornado, Etsy, and LeapFrog are all trailblazers in assuring sustainability and impact, and other corporates and investors are likely to follow their lead. As sustainable and impact investing continues to grow, assurance is only becoming more important. As LeapFrog founder Andy Kuper says, “It’s time to trust companies and investors who say they are contributing to such a brighter future – but also to verify.”
