Written by Margot Brandenburg Posted on February 25, 2010
Margot Brandenburg is an Associate Director at the Rockefeller Foundation in New York City, where she leads the social and environmental performance component of their Impact Investing program initiative.
Much has been made over the past year and a half of the outsized (and, it turns out, unsustainable) returns being made on Wall Street, and the negative externalities of those investment decisions for taxpayers and the public. This phenomenon, enabled by opacity, non-disclosure, and ill-purposed “creativity” in accounting and reporting, is itself a reminder that XBRL and related pieces of information architecture have a critical role to play in the standardization, transparency. and exchange of information about company and investment performance. Perhaps greater implications for the future of XBRL, however, come from a countervailing trend: the rise of impact investing and related strategies for integrating social and environmental impact in investment decisions.
There are a number of ways investors can incorporate social and environmental considerations into the due diligence and management of their investments. For purposes of simplification, it is perhaps easiest to group these into two categories: helping or requiring companies to do “less bad,” and helping or requiring them to proactively “do good.” The line between the two is arguably a blurry one, and may lose its distinction entirely in certain cases. Nonetheless, it is a helpful starting point for understanding the multiple applications of non-financial information in investing.
Activities that fall into the first category – helping companies do less bad – are typically employed with respect to large, publicly traded companies. They may take the form of shareholder resolutions or divestment strategies at the company level, or investment screens at the fund level, where fund managers avoid investments in whole industries or geographies (e.g., tobacco, Darfur) or in the worst-performing companies within a given industry (such as the coal company that pollutes more than its peers, etc.). According to a recent study by the consulting firm Booz & Co, 7% of all global assets are now screened. In the US, the US Social Investment Forum estimates this figure to exceed 11%.
Screening and related strategies for encouraging corporations to do less bad received a huge boost last month, when the SEC issued a rule providing interpretive guidance to companies for reporting on the climate change-related dimensions of their activities. The role of XBRL in facilitating the communication of climate change-related data has already been codified through the Global Reporting Initiative, a framework for sustainability reporting that became the first of its kind to utilize an XBRL taxonomy (see Sean Gilbert’s post on this blog). Additional frameworks, such as that of the Carbon Disclosure Project, may soon migrate to an XBRL standard as well. The recent SEC ruling may also pave the way for mandating the disclosure of additional dimensions of non-financial performance, such as those related to water, human rights, etc. – all of which would be usefully reported and communicated using XBRL.
While smaller in size than screening, impact investing -- investments in companies and funds that actively seek to generate a positive social and/or environmental impact while providing a financial return – is also poised to play an important and growing role in the coming years and decades. Impact investing includes sectors like microfinance and clean technology, where it has penetrated mainstream investment activity, as well as emerging sectors like water, health, and agriculture. A 2009 report by the Monitor Institute, Investing for Social and Environmental Impact, describes the rise of activity in this area and estimates that it could grow to 1% of total assets under management (estimated to be $30 trillion at the end of 2008).
Impact investing lies somewhere between philanthropy and purely commercial investment activity, in a ‘murky middle’ that is often still sub-scale, confusing, and fragmented. However, there are powerful indications that it is growing in size and coherence. Within the past few years, investment banks have launched social sector finance units, pension funds and insurance companies have created dedicated social investment funds (often alongside of negatively screened funds), and a proliferation of foundations and family offices have concentrated their assets in this area. The diversity of impact investors is matched by the range and creativity of business models that are putting this type of money to work, from microfinance banks in Cambodia to solar panel manufacturers in Ohio to agricultural cooperatives in Tanzania. In between them, a number of specialized fund managers, investment vehicles, and service providers have emerged to facilitate the intermediation of capital. The participants in this marketplace are primarily still private actors, and the mainstay of its activity remains largely outside the purview of the SEC and other regulators. However, investors, funds, and company managers active in impact investing all require extensive information on social and environmental -- as well as financial -- performance, and thus represent a large source of demand for new applications of XBRL.
The Microfinance Information eXchange (MIX) became the first organization to publish an XBRL taxonomy in service of the impact investing industry, and it was recognized by XBRL International in 2009. The MIX’s Microfinance Taxonomy 1.0 is (as one might expect from the name) specific to microfinance, which is but one sector within the broader impact investing industry. The Global Impact Investing Network (GIIN) recently published v1.0 of an XBRL taxonomy called IRIS (Investment Reporting and Impact Standards), which is designed to service a broad range of sectors and activities within impact investing. IRIS includes microfinance – and incorporates relevant elements of the MIX taxonomy for this purpose – as well as domains such as environment, community development, health, and agriculture. Like the broader impact investing industry itself, IRIS lies at the intersection of profit-making and social-purpose motivations: it emerged as a partnership between non-profit organizations whose mission is to find and scale solutions to the world’s most pressing problems, and for-profit companies with expertise in the areas of accounting, auditing, and business reporting. [Disclosure: Hitachi Consulting is one of the for-profit companies – ed.]
The creation of the IRIS taxonomy enables the industry-level data aggregation and benchmarking that are crucial for setting performance standards for this hybrid area of investment activity. These activities are being undertaken by the GIIN, with a combination of support from private and non-profit partners. The IRIS taxonomy is also being embedded in a number of related products and information services, such as portfolio management software and rating systems (notably the Global Impact Investing Rating System, or GIIRS). Standard definitions and data elements, which form a common language, must serve as the basis for the myriad pieces of infrastructure that the emerging impact investing industry requires.
The diversity of activity represented within impact investing will also require the exchange of batch data between sector-specific aggregators of information and industry-wide stewards such as the GIIN. Here too XBRL has a critical role to play. The IRIS and MIX teams are currently collaborating on the development of technological infrastructure to communicate data, using XBRL as the means of exchange. They are, moreover, doing so in such a way as to maximize the scalability and extendibility of the solution so that it can, in a future phase, support exchanges with other organizations and in additional sectors.
More information on impact investing is available on the Rockefeller Foundation’s website or on that of the Global Impact Investing Network.
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