Why We Signed the Impact Principles
Issue 4 | What We Learned, Why It Mattered
The Impact Principles (Operating Principles for Impact Management) are international standards for impact investment. As of May 2024, 183 organisations across 40 countries have signed up (including 8 from Japan, with 5 having completed verification). However, its adoption in Japan is still in its early stages.
SIIFIC signed up as an organisation in June 2023 when establishing the “SIIFIC Wellness Fund.” Additionally, SIIF (Japan Social Innovation and Investment Foundation) signed the Impact Principles in December 2022 alongside Shinsei Impact Investment. Their “Hataraku FUND” adheres to these principles. Here, Reiri Miura, Co-Founder and Representative Partner of SIIFIC speaks with Nanako Kudo, Executive Director and Yuya Kato, Impact Officer of SIIF about what is required to sign the Impact Principles and the benefits of doing so.
What are the Impact Principles?
The Impact Principles provide a framework for investors to design and implement an impact management system, integrating impact considerations throughout the investment lifecycle. There are nine principles divided into five stages: “Strategic Intent,” “Origination & Structuring,” “Portfolio Management,” “Impact at Exit,” and “Independent Verification.”
Source: Operating Principles for Impact Management: The 9 Principles
The Impact Principles were published in 2019 by the International Finance Corporation (IFC), part of the World Bank Group focused on developing the private sector in emerging markets. Currently, the Global Impact Investing Network (GIIN) serves as the secretariat. While there are several similar international standards, the Impact Principles are unique in being the most trusted and globally recognised framework specifically for impact investment.
Why Sign the Impact Principles?
Nanako Kudo: What motivated each of you to sign the Impact Principles?
Reiri Miura: For SIIFIC, the motivation was straightforward. As we aim to be a global impact fund, it was natural to operate from the outset according to global standards. Since the Impact Principles are the most recognised framework worldwide for impact investing, signing them was our first step.
Yuya Kato: For SIIF, signing was essential to achieve the objectives of the “Hataraku FUND.” Our mission is to prove that a full-scale impact investment fund involving institutional investors can succeed in Japan. There are two key points to this success: first, ensuring portfolio companies achieve impact-oriented IPOs, and second, operating the fund in line with global impact investment standards. To validate and publicise these points, it was crucial to involve external perspectives and undergo verification by signing the Impact Principles. This public declaration asserts that “this fund is properly managing impact.”
What are the Conditions for Signing the Impact Principles?
Nanako: SIIFIC started moving towards signing even before the fund was established, right?
Reiri: Yes, about a month before the fund’s launch, we inquired with the secretariat if we could sign simultaneously with the fund’s launch. The response was that as long as our impact management system is in place, we could sign at any time. It wasn’t necessary to have practical experience; having a documented impact management system was sufficient. According to the secretariat, many organisations sign during their fundraising process.
Yuya: The signing entity can be an organisation, a fund, or even at the investment level.
Nanako: So, anyone willing to engage in impact management can sign?
Yuya: Basically, yes. Additionally, it’s required to pay a registration fee based on the amount of assets under management and to submit a Disclosure Statement within a year of signing. Disclosure Statement explains how the organisation’s impact management system aligns with the nine principles.
Reiri: To become a signatory, you must establish an impact management system consistent with the Impact Principles. After signing, within two years, an independent verification must be conducted to ensure the fund is operating according to the Disclosure Statement. Subsequent verifications are required every one to five years.
What are the Benefits of Signing the Impact Principles?
Nanako: What are your thoughts after signing the Impact Principles? How do you perceive them?
Yuya: I see the Impact Principles as a comprehensive and user-friendly guide for anyone committed to impact investing. They cover the entire range of necessary activities—developing an investment strategy, building a portfolio, selecting investments, engaging as an investor, measuring impact, managing risks, and making the whole process transparent and continuously improving. Even before signing, we prided ourselves on properly managing and measuring impact. However, without signing and undergoing independent verification, others might dismiss our efforts as mere self-assessment. Signing and being verified provide a seal of approval and ensure objective credibility.
Reiri: Becoming a Signatory has given us a ticket to enter the impact investment community. When we participate in the global impact investment community, mentioning we’ve signed the Impact Principles immediately identifies us as an impact fund, putting us on an equal footing with others.
Nanako: So, it’s about being recognised as an impact investor adhering to global standards, with international organisations validating your impact management. This could be crucial to avoid impact washing.
What is the “Disclosure Statement”?
Nanako: I understand that the only condition for signing the Impact Principles (apart from registration and annual fees) is to submit a “Disclosure Statement” within a year of signing, which must be updated annually. What exactly is this statement?
Yuya: Signing the Impact Principles signifies our commitment to aligning our impact investment process with its nine principles. Therefore, we need to disclose our impact management activities, which is done through this statement.
Hataraku FUND had already been operating with reference to the nine principles of the Impact Principles before signing. We studied the principles and applied them to our operations, gradually building our processes. However, we wanted to understand how our operations appeared from an external perspective, which motivated us to sign.
Creating the Disclosure Statement involved documenting our operations in line with the nine principles. Some parts were straightforward to write, while others were more challenging. The process itself prompted us to review our operations, leading to many insights.
Reiri: The Impact Principles website publishes the Disclosure Statements and independent Verification Summaries of its signatories. We started by studying the Disclosure Statements of similar funds among the signatories worldwide. We thoroughly analysed those from funds with similar sizes and investment types to ours. There were many styles to the statement.
Advanced funds also publish their independent verification results, allowing us to identify highly rated funds. We read these statement and verification summaries, discussed them within our team, and decided how to write our own statement.
A week after submitting our Disclosure Statement to the Impact Principles secretariat, we received two correction requests and two pieces of advice. The requests were to specify the total assets under management in US dollars and to provide a link to the independent verification summary (Principle 9). The advice was to explicitly state if we use IRIS+ or HIPSO for impact assessment and to provide detailed definitions of “Seeds” to enhance transparency (Principle 4 or 6).
For the SIIFIC Wellness Fund, the initial screening criteria for investments are alignment with four investment themes and meeting the definition of “seeds,” which includes “ideas,” “science,” and “needs.” We initially wrote this concisely, thinking it wasn’t directly linked to our impact management system. However, it was suggested that we describe in detail for greater transparency, so we included it in the final statement.
The second piece of advice was to provide links to ESG policies if available to enhance transparency (Principle 5). Since we had these policies on our website, we added the relevant links.
What Effort Goes into Preparing the Disclosure Statement?
Nanako: How much work and effort went into preparing the Disclosure Statement?
Yuya: We had one core member each from SIIF and Shinsei Impact Investment, with others providing feedback and materials as needed, so about two to three people. The overall workload was similar to producing an impact report. However, the final document had to be in English, which can be a challenge for Japanese teams. Basic communication and information sharing can utilise machine translation tools like DeepL.
Reiri: At SIIFIC, the fund managers (Kazu and Reiri) lead the impact due diligence and so it was natural that fund managers prepare the Disclosure Statement. Since we signed up on the day of the fund’s launch, we had to document the impact management system from scratch. This process took about two months, including team reviews, with a net time of about a week. Preparing it in English from the start eliminated the need for translation, reducing time and effort. Although the Disclosure Statement must be submitted annually, future submissions should be less demanding.
What is the “Independent Verification” Conducted Every 1-5 Years?
Nanako: What does an independent verification by verifiers entail?
Yuya: The independent verifier (BlueMark for “Hataraku FUND”) reviews our submitted “Disclosure Statement” and verifies if we are implementing what we stated. They evaluate our internal materials, spreadsheets, and checklists used in actual investment and support activities. BlueMark’s greatest appeal is their extensive verification experience, allowing comparisons with similar funds, and providing practical improvement suggestions.
Reiri: SIIFIC selected its independent verifier through a proposal process, with BlueMark and Phenix Capital Group submitting the proposal. After interviews, we chose Phenix, primarily because they had a Japanese senior advisor in the team. She had the authority to evaluate Japanese documents which saved us from translating into English. Fee was also a factor; Phenix offered a more affordable verification package for a newly launched fund going through first verification, understanding the importance of confirming our system’s alignment with the nine principles. The process, however, took about a month, equivalent to the duration of full assessment. We received thorough and constructive feedback from Phenix team during the final report meeting, which was very insightful for the entire investment committee of SIIFIC Wellness Fund.
Insights from the Independent Verification Process
Nanako: What are your reflections after undergoing the verification process?
Yuya: It was highly beneficial in identifying areas for fund improvement. BlueMark provided specific advice on necessary adjustments, closely tied to practical processes. We are now revising our fund management processes and creating manuals based on this feedback, which is enhancing our understanding and implementation of impact investment across the team.
Nanako: Can you give examples of the feedback received?
Yuya: For example, “Principle 1” under “Strategic Intent” requires defining strategic impact objectives aligned with the investment strategy. “Hataraku FUND” received high marks for aligning its impact goal of “creating diverse working and living styles” with global goals like the SDGs and establishing a comprehensive Theory of Change for the entire fund. We received particularly high marks for engagement with portfolio companies (“Principle 3”) and practical implementation of IMM (“Principle 4”). However, since we have not yet exited investments, “Principle 6” (Portfolio Management) and “Principle 7-8” (Impact at Exit) were rated standard. It appears few funds have high ratings for “Impact at Exit.”
Nanako: SIIFIC published its independent verification summary results, right?
Reiri: Yes, as a new fund, we decided to publish our results even if they were not perfect. We thought that this transparency allows stakeholders to see our progress over time. Our “Principle 2” (Impact Management at the Portfolio Level) and “Principle 8” (Monitoring) were marked LOW. This was mainly due to having only one portfolio company at the time of assessment and not yet reaching the KPI measurement stage. “Principle 5” (ESG Risk Management) also scored LOW, primarily due to lack of documentation at the time of assessment. We had many instances where we realised that, although we were practicing good impact management system, the processes were not adequately documented.
Yuya: Venture capital often requires bespoke approaches for each investment, but we learned that standardising processes and formats for impact management is crucial. It ensures reproducibility in managing aspects that are less tangible than profits or cash flow.
Reiri: It was gratifying that Phenix recognised the innovative nature of our system thinking approach to impact investing, stating that it represents an advanced approach even at global level. This feedback was a significant confidence boost.
Future Focus for Impact Principles Signatories
Nanako: What areas do you plan to focus on following the verification?
Yuya: Our next focus is “Impact at Exit,” specifically impact IPOs. Recently, the first edition of “Guidance for Disclosure and Dialogue in Capital Markets for Impact Enterprises” was published. Since “Hataraku FUND” is deeply involved in these discussions, we plan to develop specific strategies based on this guidance.
Reiri: We need to systematise and document processes like creating system maps so that they can be shared with anyone.
Nanako: Is there a network among Impact Principles signatories?
Yuya: Yes, globally, many webinars are held, and we also have meetings with other signatories in Japan. As there are still few signatories in Japan, we encourage others to consider signing up. We are happy to provide advice and support for those interested. The Impact Principles offer a structured and goal-oriented approach, making them accessible.
Reiri: With around 180 Disclosure Statements already published, there’s a wealth of learning available. If you have a well-developed impact management system, you can undoubtedly prepare a compelling Disclosure Statement.