Growing Impact: New Insights into the Practice of Impact Investing
BlueOrchard’s contribution to the International Financial Corporation 2020 report on impact investing, a case study on Operating Principle 5. Written by Maria Teresa Zappia, Valerie Harrington, and Kathryn Sutton.
After almost 20 years of proven track record and growth, BlueOrchard is a living example of the commercial viability of, and business case for, impact investing. BlueOrchard’s mission is to make an intentional, positive, social, and environmental impact across a variety of sectors in emerging and frontier markets while providing attractive returns to investors. In unison with BlueOrchard, the impact investing industry has grown substantially over the years, attracting larger investors and the potential to generate significantly more funding to scale up industry activity. However, an essential component of doing so is improving, professionalizing, and standardizing the industry’s impact management, as this demonstrates the effectiveness and relevance of impact investments toward achieving the SDGs.
The Operating Principles for Impact Management play a key role in this regard, as they demand transparency, consistency, and standardization, ultimately resulting in a sustainable and responsible advancement of the industry that benefits all players. Assessing, addressing, monitoring, and managing the potential negative impacts of each investment is extremely relevant for our practice, as a proper impact assessment needs to consider any negative impacts, and mitigation can come only after those have been identified. In order to assess both our positive and negative impacts, we have been using and improving our Social Performance Impact Reporting and Intelligence Tool (SPIRIT) for 10 years as an integral part of our investment analysis process. This tool not only allows for the analysis of a potential investee’s social or environmental impact but also finds the gaps and deficiencies in its business operations. Once the weak points are identified, we can decide how and if we will engage with the potential investee, keeping in mind that improvements at an investee level have the potential to amplify overall impact for the end beneficiaries. To assess the social performance policies and processes of current or prospective investees, SPIRIT focuses on six key areas of social impact aligned with the Universal Standards of Social Performance Management, plus a seventh focused on environmental protection.
Together these create an eligibility score up to 100 for each investee. In putting theory to practice, BlueOrchard recently engaged with a potential investee operating in the retail sector and the financing of durable consumer goods for low-income households in Latin America. The due diligence and SPIRIT assessment showed a certain lack of formalization in the social and environmental procedures of the company but reflected overall good practices. Moreover—and imperative for the advancement of the relationship—the company showed great willingness to improve these procedures, as it found the gaps were due to a lack of information and guidance regarding best practices. BlueOrchard saw this as an opportunity to increase its additionality and further develop its understanding of that particular business model. Using loan covenants as a management and monitoring tool, BlueOrchard and the investee agreed on binding conditions to the loan. These conditions required the investee to go through a specific third-party certification that would entail a thorough analysis of client protection practices and formalization of its internal processes.
It is important to closely interact with and monitor investees in order to ensure that agreements are being implemented. From the manager side, however, this is limited by time and resources, as this thorough interaction cannot be done with all investees. Loan covenants with early repayment features, good relationships with investees, and periodic impact assessments are therefore crucial as they help mitigate risks. Moreover, having a goal of balancing financial and social return is imperative to succeed in the implementation of Principle 5 and in impact investing in general. Overall, the Operating Principles for Impact Management provide structure to managers and confidence to investors, which together attract more capital to be invested through a stricter process— and thus allow for greater impact.
The report also highlights the enormous potential to invest for impact in public equity markets. Today, assets totaling about $10 trillion are actively managed and these strategies could be directed toward achieving impact. The publication includes trends in impact investing, survey results of investor practices, and 32 case stories from signatories to the Operating Principles for Impact Management on how they are implementing them.
Click here to access the IFC Growing Impact: New Insights into the Practice of Impact Investing report.