So-called “impact investments” distinguish themselves as such because they purport to pack a positive social impact. But that claim begs the question: Can anyone confirm or quantify that impact? The people behind GIIRS, which stands for Global Impact Investing Rating System, are working on it. They’re in the process of building something like a Moody’s rating agency for social impact.
In fact, Moody’s is one of a handful of major institutions involved in the advising or funding of the GIIRS (pronounced “gears”) endeavor. Along with Moody’s, representatives from Bank of America and JP Morgan participate in an advisory council that helps guide the development of the project, and Deloitte, Prudential and USAID and have been major investors in it.
Helping to galvanize interest in impact investing was a report published last November by JP Morgan and the Rockefeller Foundation called “Impact Investments: An Emerging Asset Class.” The report’s authors estimate that over the next decade, growth within just five selected sectors of impact investing will generate profits of between $183 billion and $667 billion, and attract collective investments of between $400 billion and $1 trillion.
But plenty of challenges need to be addressed before impact investing is embraced as a mainstream asset class for institutional investors. GIIRS was formed to tackle one of the most basic: lending credibility and structure to a nascent investment space.
“This is something that can help define an asset class in terms of what does count as an impact investment and what doesn’t,” says Beth Richardson, director of GIIRS. “There’s no use in just letting companies tell their own stories, because they can always just tell the piece of the story they want, and not disclose the rest.”
GIIRS, a wholly owned subsidiary of Berwyn, Pennsylvania-based non-profit B Lab, is currently in the process of beta-testing its rating system. This involves on-site visits to 200 social entrepreneurs sprinkled across North America, Latin America, Africa and Asia to gather feedback about the relevance and appropriateness of the impact assessment.
The projected public launch of GIIRS is July of this year, and once the project is public any company or investment fund can request to have its social impact tested by GIIRS (in the present beta-testing, GIIRS is assessing only the 200 companies it pre-selected for the research phase).
In some ways, the project fits into a tapestry of growing efforts to link investments and companies’ operations to their environmental and community impacts. Organizations like the Global Reporting Initiative and the International Integrated Reporting Committee are also focused on making it possible for investors to ascertain these kinds of linkages. But those initiatives focus on improving the reporting of publicly listed companies; GIIRS is the first cross-sector, cross-geography effort to do so in the private space, says Richardson.
Working with the likes of private equity and venture capital funds – and the private companies they invest in – creates some challenges that the organizations focusing primarily on the public markets don’t have to face in quite the same way. Despite B Lab’s and GIIRS’ strong advocacy of transparency in the investing and corporate worlds, the project has had to strike a careful balance between transparency and the opacity insisted upon by the private funds and companies providing it with information.
“It’s a different market than the public market,” says Richardson. “There’s no way to get the information without companies’ and funds’ participation, and so we need to respect their boundaries as far as their willingness to provide that information. We’ve had feedback from companies and funds that they’d be hesitant to share information if they were required to publicly disclose it, and we didn’t want that to be a barrier to adoption.”
All rated companies and funds will be listed on the GIIRS website after the public launch, but deeper, more detailed information like actual ratings will only be fully disclosed to direct investors in a given company or fund.
Richardson says the GIIRS team recognizes that scaling up and attracting mainstream interest in impact investing will likely require some substantiation to the argument that it’s an asset class that can outperform in financial terms and not just philanthropic ones. GIIRS, in the interest of maintaining a pure focus on investments’ social impact, will be staying out of that debate, but Richardson says it’s a topic the team hopes other people will tackle.
Already, GIIRS has enlisted Duke University’s Center for the Advancement of Social Entrepreneurship (CASE) to help spur the interest of the academic community in researching answers to questions around impact investments’ financial returns. CASE held two webinars in March to introduce the GIIRS data to interested researchers.
In other ways, too, larger networks of interest will have to form across the investment industry landscape before GIIRS can scale up, says Richardson. Again, because GIIRS focuses on private entities, companies and funds will only ever be rated of their own volition. But that doesn’t mean that incentives couldn’t start to emerge to encourage reticent funds and companies to do so.
“It’s all dependent upon investors,” says Richardson. “I don’t think you’d be able to do what the public markets have done, which is kind of provide ratings for a broad swath of companies without their participation. But if investors are requiring their funds to be rated, and funds in turn are requiring their portfolio companies to be rated, you have the potential for a broader audience to have gone through this process. So an important component of GIIRS is making sure we’re reaching out to institutional investors and helping them understand why this could be valuable to them.”
