On April 12, 2019, the International Finance Corporation (IFC), a World Bank Group, officially launched their Operating Principles for Impact Management (the Principles). As of the official launch date, 60 global investors have committed to the Principles. The first adopters range from large asset managers, private funds to non-profit investment firms. The focus of the Principles is on impact investing, a term that IFC defines as “investments made into companies or organizations with the intent to contribute to measurable positive social or environmental impact, alongside a financial return.” IFC adapted this definition from GIIN and notes that impact investing focuses on more than just avoiding harm or managing environmental, social and governance (ESG) risks; it aims to utilize investing’s ability to positively impact society by “choosing and managing investments to generate positive impact while also avoiding harm.” This focus seemingly goes beyond the UN initiated Principles of Responsible Investing or UN PRI, which were tailored to the idea of responsible investing – investing with the goal of incorporating ESG factors into decisions in order to manage risk and generate long-term returns.
What Data Gathering, Monitoring and Disclosure do the Principles Require? Nine principles make up the new IFC framework, which framework is designed to provide a market standard for impact investing while taking into consideration all phases of the investment cycle. The organizations that adopt the Principles voluntarily commit to manage their assets invested for impact in accordance with the Principles. Taken together, the 9 Principles ask asset managers to quantify the potential positive impact of each investment, monitor the progress toward achieving these impacts and publicly disclose their alignment with the Principles on an annual basis.
Background? IFC began developing the Principles in April 2018, when they brought together a group of asset managers and owners as well as financial institutions to create the consultation draft, with the Global Impact Investing Network (GIIN) and the Impact Management Project (IMP) participating as observers. Following this preparation stage, the Principles were available for broader stakeholder review by investors, companies, academics, civil society and governments, until in January 2019, IFC consolidated the input to finalize the Principles by March 2019.
IFC has a history of advancing international standards related to ESG and sustainability, most notably through the continual revision of its Environmental and Social Performance Standards, which define clients’ responsibilities for managing ESG risks. These standards have arguably made IFC an influential player in the ESG benchmarking space, as, for example, the Global Reporting Initiative (GRI) has included IFC in its selective list of alliances and synergies with the GRI Guidelines.
Why Relevant? The narrowing of IFC’s ESG focus to impact investing is a more recent development. This development comes on the heels of an April 2019 GIIN survey, which reported that the impact investing market represents $502 billion assets worldwide and that 86% of respondents said they entered the impact investment market due to client demand. A report published around the same time by IFC explains that demographic shifts, such as the transition of wealth from Baby Boomers to Generation X and millennials account for some of this demand.
Future Uptake? It remains to be seen how IFC’s Principles will measure up to existing frameworks, though perhaps the most notable implication thus far is the Principles’ ambition to create uniformity and comparability in the impact investing market, a market that has previously lacked these characteristics.
Legal assistant, Sarah Foster, contributed to this post.