Signing the Impact Principles: Part 2 “Disclosure Statement” and “Independent Verification”

Impact Principles (Operating Principles for Impact Management) are international standards for impact investment. The “SIIFIC Wellness Fund,” co-managed by SIIFIC and SIIF and the “Hataraku FUND,” co-managed by SIIF and Shinsei Impact Investment both adhere to these principles. In this second part, we delve into the annual “Disclosure Statement” required for signing the Impact Principles and the periodic “Independent Verification” that follows.

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.

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What is the “Disclosure Statement”?

Yuya Kato: 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 Miura: 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?

Yuya Kato: 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 Miura: 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?

Yuya Kato: 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 Miura: 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

Yuya Kato: 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.

Yuya Kato: 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.”

Reiri Miura: 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 Kato: 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 Miura: 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

Yuya Kato: 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 Miura: We need to systematise and document processes like creating system maps so that they can be shared with anyone.

Yuya Kato: 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 Miura: 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.