IRIS and GIIRS by Sang-yoon Kim

ESG INSIGHT

Introduction to

Impact Reporting and Investment Standards (IRIS) AND

Global Impact Investing Reporting System (GIIRS)

2012. 06. 김동혁

Introduction to Impact Reporting and Investment Standards (IRIS) AND Global Impact Investing Reporting System (GIIRS)

I. What is impact investing? A. Definition and examples Impact investing is defined as actively placing capital in business and funds that generate social and environmental good and at least return nominal principal to the investor (Monitor Institute, 2009). Major research institutes project that impact investing has the potential to grow to about 1% of total managed assets, which takes a value in between $500 billion to $1 trillion (Monitor Institute, 2009 and GIIRS, 2010). One example of impact investing is the case of responAbility (Zurich-based advisory) channeling about $600 million into microfinance (Monitor Institute, 2009). Microfinance is an especially promising field in the social enterprise industry; microloan volume has grown from $4 billion in 2001 to $25 billion in 2006. Another example of impact investing is the case of International Facility for Immunization raising up to $4 billion in triple A-rated bonds for the provision of vaccines that could save up to five million lives in the next ten years (Monitor Institute, 2009). The bonds were backed by eight donor countries and managed by Goldman Sachs and Deutche Bank. B. SRI versus impact investing Distinguishing impact investing from Socially Responsible Investment (SRI) is key to understanding impact investing. JP Morgan states that SRI seeks to minimize negative impact while impact investing seeks to proactively create positive social or environmental benefit (2010). This view is debatable given that shareholder activism is an important aspect of SRI. One could argue that proactive promotion of social or environmental benefit can be pursued through shareholder activism, hence weakening above statement. The table below, produced by Grant Makers Health, compares the characteristics of SRI and impact investing (2011).

Feature

Purpose

SRI (Active ownership) Screening Shareholder activism - Align with mission - Avoid socially irresponsible companies, seek responsible companies

- Align with and drive mission - Influence corporate behavior

Typical assets

Endowment

Securities

Market-rate

Asset classes

Mostly stocks (public equities)

Mostly stocks

Impact investing Proactive investing - Drive mission - Finance proof of concept, scaling, sustainability; leverage commercial investors Program or endowment Range of expected return levels, including marketrate and below-market-rate Debt, private equity, deposits, guarantees, and real assets

Table 1

One should note that SRI is directed at publicly traded securities, while impact investing can be directed at both publicly traded and privately held securities. Moreover, impact investing assets can form a wide variety of classes, while SRI assets are largely limited to public equities. Furthermore, while the impact types that SRI can invest in are restricted to the business types of the publicly traded companies, impact types of impact investing includes all business types of social enterprise companies. Some impact themes of impact investing include, but are not limited to: 1. Microfinance, low-income financial services, micro insurance 2. Fair trade 3. Nonprofit social enterprise 4. Small and medium business development 5. Affordable housing and community development 6. Education and charter schools 7. Water and sanitation 8. Health and wellness 9. Media, technology, and mobile 10. Clean technology, alternative energy, and climate change

11. Sustainable agriculture and development 12. Natural resources and conservation One could argue that themes 7-12 can be pursued through both SRI and impact investing, while it is relatively difficult to find publicly traded companies that conduct businesses of themes 1-6. C. Barriers to the growth of impact investing Despite promising prospects of impact investing as a rising field of social investment, major barriers to its growth remain unresolved. In 2011, the British government identified five major barriers to the future growth of impact investing: 1. Imperfect information a. Information asymmetry between borrowers and lenders b. Lack of information on social return c. Confusion over terminology d. Imperfect knowledge about existing investment provision e. Lack of information about government policy 2. Imperfect competition a. High transaction cost b. Lack of brokers/advisers c. Lack of secondary markets d. Artificial suppression of demand e. Variable commissioning practice in local and national government 3. Externalities 4. Absence of public goods a. Failure of the market to provide public goods (no industry association for intermediaries, no social investment stock exchange) 5. Cultural and behavioral barriers

a. Lack of business skills among social ventures b. Risk aversion among social ventures c. Risk aversion among lenders d. Lack of public understanding of social enterprise D. Solution strategy And in response, the British government devised the following long-term action plan to tackle at the identified barriers (2011):

Figure 1 Note that actions become increasingly direct (to the point of becoming direct interventions in the market) as they reach near the center of the diagram. Recent announcements by SK, Hyundai, and Seoul Metropolitan Government to support start-up social enterprises by providing educational opportunities and supporting their product promotions would belong to category C or D of the diagram (Naver News, 2012)

II. What is IRIS?1 A. Description and objective IRIS is a common reporting language for impact-related terms and metrics. By standardizing the way organizations communicate and report their social and environmental performance, IRIS aims to increase the value of non-financial data by enabling performance comparisons and benchmarking, while also streamlining reporting requirements for companies and their investors B. Users of IRIS Users of IRIS include investors in funds, direct investors, social enterprises, and other organizations and intermediaries. With a growing proportion of portfolios dedicated to mission-driven funds, investors in funds can use IRIS to effectively evaluate and compare composite values of their investments. Direct investors can credibly track and report the social and environmental performance of their portfolio companies using IRIS. IRIS also plays the vital role of allowing private companies attract impact investors by measuring and reporting both financial and non-financial performance in IRIS. And lastly, organizations and intermediaries can use IRIS as the basis for a shared reporting framework. C. Development of IRIS The initiative to first develop IRIS was launched relatively recently. In 2008, Rockefeller Foundation gathered a group of pioneering impact investors to identify barriers to impact investing. Among many barriers, the lack of market infrastructure was identified as an immediate obstacle to be resolved, and Rockefeller Foundation, Acumen Fund, and B Lab decided to first initiate IRIS in the same year. In 2009 spring, Deloitte and PWC were hired to develop the initial framework of IRIS. By summer of the same year, version 1.0 was completed. In 2009 fall, IRIS became an initiative of Global Impact Investing Network (GIIN). In 2010, version 2.0 was completed and the latest version, version 2.2, was

This part is based on materials available on IRIS homepage: http://iris.thegiin.org/. See references for specific materials used.

completed in November 2011. D. Brief guide to IRIS framework A common IRIS report consists of six parts: 1. Organizational description: indicators that focus on the organization’s mission, operational model, and location 2. Product description: indicators that describe the organization’s products and services, target markets, and core attributes 3. Financial performance: commonly reported financial indicators 4. Operational impact: indicators that describe the organization’s policies, employees, and environmental footprint 5. Product impact: indicators that describe the performance and reach of the organization’s product and services 6. Glossary IRIS indicators are designed to apply across sectors and geographies. Different business sectors where IRIS can be applied include: 1. Cross sector 2. Agriculture 3. Education 4. Energy 5. Environment 6. Financial services 7. Health 8. Housing and community facilities 9. Water Cross sector indicators are relevant to an organization regardless of sector (e.g. water usage). Agriculture

sector indicators measure the environmental aspects of agricultural practices. Education sector indicators measure the core features of school such as facilities, teachers, and student performance. Energy sector indicators measure the performance of products and services that seek to reduce energy consumption or conserve energy. Environment sector indicators measure the performance of products and services that conserve natural resources, reduce threats to biodiversity or reduce pollution. Financial services sector indicators measure the financial and social performance of organizations that provide financial services to underserved populations. Health sector indicators measure the common performance areas for health care facilities such as occupancy, utilization, and wait time. Housing and community facilities sector indicators measure the core aspects of projects including percent of affordable housing and use of green-building practices. And lastly, water sector indicators measure the performance of products that conserve water, improve the quality of water, or increase the availability of quality water. Reference to the IRIS taxonomy available on the official IRIS webpage is suggested to get a sense of the current IRIS indicators: http://iris.thegiin.org/indicator/downloads. IRIS is also in the process of developing an initial set of performance benchmarks based on its repository where IRIS performance data of different companies are maintained. Companies voluntarily contribute their performance results in IRIS metrics under the condition that their anonymity is guaranteed. In the near future, IRIS hopes to provide the following benchmark measures: trends over time, sector-specific performance, and client, supplier, distributor, and employee demographic information. E. Sample report Several sample reports are available on the official webpage; they are IRIS-based impact reports of hypothetical companies in different business sectors. A sample report whose URL is copied below is that of a hypothetical company named, Solar Today, which is assumed to produce high performance silicon solar cells: http://iris.thegiin.org/report/solar-today. One can verify that the report consists of six parts as outlined previously and that it includes cross-sector and energy sector indicators. Furthermore, the indicators are mostly quantitative and binary, suitable for an quantitative evaluation of impacts.

III. What is GIIRS?2 A. Description and features GIIRS is a comprehensive and transparent system for assessing the social and environmental impact of companies and funds with a ratings and analytics approach (analogous to Morningstar investment rankings of S&P credit risk ratings). Some of the important features of GIIRS include: verified company ratings and fund ratings, ratings for developed and emerging markets, aggregate ratings, as well as ratings within numerous impact areas and industry sectors, social and environmental performance metrics and key performance indicators specific to different industries, impact areas, and investor preferences, and lastly benchmarking and analytics for longitudinal comparability. GIIRS employs the following criteria when evaluating a company or funds: 1. Holistic 2. Positive performance; no negative points weighted negative screens 3. Action oriented; more weight on actions than intents 4. Scalability oriented; more weight on companies that take proactive steps to institutionalize impact-related practices and policies 5. Comparable across organizational size 6. Leverage of third party certifications 7. Educational and management tool; "best practice guides" provided in the assessment 8. Transparent; assessment weightings visible to any interested parties online 9. Dynamic; new version of the rating system released every two years 10. IRIS-based B. Development of GIIRS Just like IRIS, introduction of GIIRS is a relatively recent development. It is important to note that GIIRS is a wholly owned subsidiary of B Lab. GIIRS was developed by non-profit B Lab and 2

This part is based on the materials available on GIIRS homepage: http://giirs.org/. See references for specific materials used.

powered by the B Impact Rating System (online self-assessment tool that measures companies’ and funds’ social and environmental performance). B Lab was founded by Kassoy, Houlahan, and Gilbert in 2006. In 2010, Rockefeller, USAID, Prudential, and Deloitte partnered with B Lab to provide $6.5 million to support the development and use of GIIRS. Version 1.0 of GIIRS was released in 2007. Version 2.0 was released in 2010, and the latest version, version 3.0, was released in 2011. As stated previously, new version of GIIRS is released every two years. C. Company assessment GIIRS evaluates impacts of both private companies and funds. Company impact ratings is a rating of the social and environmental impact of an individual company, including: overall rating, ratings in 15 sub-categories, and key performance indicators (KPIs) relevant to the company’s industry, geography, size, and social mission. Fund impact ratings is a rating of a fund’s impact based on the aggregated and weighted impact ratings of its underlying portfolio companies, including: aggregated subcategory ratings, relevant KPIs, and the assessment of fund manager practices. Company assessment is comprised of about 50-120 weighted questions divided into four distinct impact areas: governance, workers, community, and environment. Company assessment is both consistent and dynamic in that all companies are evaluated on the same impact areas, but at the same time, appropriate focus and depth are applied to issues where a company is likely to have an impact. For a given impact area, assessment process form a tiered structure, where subcategory within an impact area is chosen, and then a specific topic within the subcategory is chosen. For example, in the impact area of workers, a subcategory could be compensation, benefits, and training. And within this subcategory, a possible topic is compensation and wages, and the indicators measured include the percentage of workers paid above living wage and annual bonus and wage increases. GIIRS has developed more than 40 different tracks of the GIIRS assessment which can be applied to companies based on their individual characteristics. In specific, which assessment track that a company completes depends on: geography (developed and emerging), industry (manufacturing,

wholesale, services, agricultural growing and agroprocessors), and size (0, 1-9, 10-49, 50-249, 250+). GIIRS rating scores are out of two-hundred possible points, which are allocated into four impact areas. As for the weights of the questions, there are five different weights: 0.25, 0.5, 1, 2, 4. The weight of each question is made transparent to the general public. A typical company rating process is executed in the following order: 1. Complete GIIRS assessment (online, 60-90 minutes, initial score given) 2. Complete an assessment review (phone call, 60 minutes) 3. Make it official (payment, agreement) 4. Submit documents for a document review (2 weeks, reviewed by Deloitte) 5. Get GIIRS ratings report 6. On-site reviews (10% of all GIIRS rated companies randomly selected for on-site reviews) D. Fund assessment The break-down of GIIRS fund assessment is as following: fund manager assessment (10%) and investment roll-up (90%). And for a given to fund to receive a GIIRS assessment rating, at least 25% of capital must be deployed and at least 80% of portfolio companies must have GIIRS ratings. The fund manager assessment is comprised of approximately 50 questions regarding a fundâ&#x20AC;&#x2122;s policies and practices in deploying and managing its capital. In specific, past performance, current fund, positive impact, risk mitigation, mission lock, mission aligned exit, portfolio reporting, and capacity building are assessed. Investment roll-up score is computed simply by summing across each portfolio company score weighted by its share in the fund. A typical fund rating process is similar to that of a company rating process. The procedures are as follows: 1. Complete GIIRS assessment (online, 60-90 minutes) 2. Submit fund for approval 3. Each investment in the fund completes GIIRS Fund or Company rating process

4. Complete assessment review (phone call, 60 minutes) 5. Submit payment 6. Submit documents for document review (2 weeks, reviewed by Deloitte) 7. Get GIIRS ratings report E. Sample reports Sample company and fund assessment reports are available at official GIIRS webpage. Sample company assessment report is available at: http://giirs.org/storage/documents/GIIRS_CompanyReport_ForWordMerge3.pdf Sample fund assessment report is available at: http://giirs.org/storage/documents/GIIRS_FundReport_ForWordMerge1.pdf

IV. Case study: Shujog and Impact Investment Exchange Asia (IIX)3 A. Description and history While GIIRS is an influential impact rating system currently available, there have been several attempts by private companies to develop independent rating systems. Shujog, a Singapore-based rating system, developed by Professor Shahnaz of National University of Singapore (NUS) is one such example. Shujog is supported by Rockefeller Foundation, Asian Development Bank, and Economic Development Board of Singapore. Furthermore, Professor Shahnaz also initiated IIX to stimulate the growth of social enterprises in Asia by helping them raise capital in a capital market. B. Assessment model Shujog assesses companies based on five different impact criteria, which include: mission, financial viability, social impact, environmental impact, and sustainable impact. It is important to note that governance is not included as part of the impact assessment criteria. Furthermore, Shujog is distinct in that it aims to evaluate a given company's impact in "Asian context." In specific, Shujog claims to adhere to the following model when assessing a company:

Figure 2

Section A and B of this part are based on the materials available on Shujog homepage: http://www.asiaiix.com/shujog/.

Shujog's assessment process is conducted in the following steps: 1. Conduct in-depth sector-country research 2. Design questionnaire for the enterprise based on the background research and the Shujog Sustainability Pyramid 3. Indicators for data collection are adapted to Asian context based on IRIS 4. Supplemented with indicators developed by Shujog 5. Conduct interviews during field visits to the organization 6. Structure and analyze the collected data 7. Assesses the relation between intended and actual impact in gap analysis C. Comparison with GIIRS Shujog's assessment can be viewed as being more qualitative than GIIRS assessment. Review of sample assessment reports and methodology reveal that Shujog ratings are based on qualitative understanding of a given company's characteristics and operations. In comparison, GIIRS's ratings are more quantitative in that most questions are answered with specific numbers or choices, which can easily be converted to numeric scores. Furthermore, while GIIRS has forty different tracks of questionnaires readily available (with weights for each question pre-announced), Shujog designs questionnaires each time it assesses a company. This can lead to potential skepticism about the objective credibility of Shujog's ratings, but the upside is that questionnaires can be flexibly shaped for a wide variety of companies. Shujog's assessment is geared towards companies only while GIIRS assesses both companies and impact funds. Furthermore, Shujog's assessment is specialized towards Asian companies and emphasizes the Asian context, while GIIRS assessment can be applied across sectors and geographies. One similarity between Shujog and GIIRS is that they both adapt IRIS metrics, but perhaps to a different extent. Shujog specifically states that it employs independently developed metrics in conjunction with IRIS metrics; further research is necessary to measure the extent to which IRIS is used. Moreover, further

research on the IIX (its scale, process, and prospects) are necessary as well for a fuller understanding of how Shujog ratings are being used.

V. Conclusion and future improvements Impact investing is projected to rapidly grow in its size and significance in the future. Nevertheless, there are several major obstacles to its growth. One immediate barrier identified by several research organizations was the lack of market infrastructure such as standard reporting language and rating systems. IRIS and GIIRS are solid attempts to resolve this problem; IRIS presents a standard reporting language and metrics necessary for measuring impacts while GIIRS uses IRIS- based metrics to rate individual companies and impact funds. Frameworks and specifics of IRIS and GIIRS are both studied in this report. For IRIS to indeed become the standard reporting language and for GIIRS to become a widely adapted rating system, there are several issues that must be dealt with. First of all, IRIS and GIIRS are mainly US-based and their usage must be actively promoted outside US, such as Asia and Europe. Furthermore, policy environment supportive of impact investing and social enterprise in general must be established globally. Lastly, current impact investing is mostly done by institutional investors and philanthropic organizations, and thus impact investing is still vaguely understood by the general public. Promotion of impact investing culture for small individual investors will have to be pursued as well.

References “Investing for Social & Environmental Impact,” Monitor Institute, 2009. “Impact Investments; An Emerging Asset Class,” JP Morgan, 2010. “Guide to Impact Investing,” Grant Makers Health, 2011. “Impact Reporting & Investment Standards,” GIIN (IRIS homepage), 2010. http://iris.thegiin.org/. “Impact Investing Partnership with USAID, Rockefeller Foundation, Deloitte, and Prudential Financial to Support Entrepreneurs in the Developing World,” GIIRS, 2010. “Assessment 101,” GIIRS. “GIIRS Ratings & Analytics for Impact Investing,” GIIRS (GIIRS homepage), 2011. http://giirs.org/. “Growing the Social Investment Market: A vision and strategy,” HM Government 2011. “Impact Investment Shujog,” Shujog. "서울시, 사회적기업제품 전용 온라인몰 오픈," 네이버 뉴스, 2012. "정몽구재단, 청년 사회적기업 발굴 육성," 네이버 뉴스, 2012. "최태원 회장, 사회적 기업 MBA 만든다," 네이버 뉴스, 2012.

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