Positive impact finance
Developed by a group of banking and investor members of the United Nations Environment Programme Financial Institutions (UNEP-FI), the Positive Impact Principles are a set of guidelines to promote the development of positive impact business and finance which contribute to the achievement of sustainable development and, in particular, the Sustainable Development Goals (SDG).
The principles, making the shift to a new business paradigm and form of interaction to finance the SDGs, was introduced to members in the Asia Pacific region during the UNEP-FI Regional Roundtable in Tokyo, Japan last month which this writer was privileged to attend.
In brief, the development of a dedicated set of principles serves to guide financiers and investors in their efforts to increase their positive impact on the economy, society and the environment.
It is a set of guidelines for the principal players. Financiers shall be able to identify, promote and communicate about positive impact finance across their portfolios. Investors and donors are enjoined to holistically evaluate the impact of their investments and direct their investment choices and engagements accordingly. Auditors and raters shall provide financiers, investors and their stakeholders with the verification, certification and rating services needed to promote the development of positive impact finance.
The principles have four components: definition, frameworks, transparency and assessment. By providing a common language to the finance community and for a broader set of stakeholders, the principles are expected to constitute an important step in unlocking the opportunities in SDGs and overcoming the funding gap for sustainable development.
Principle One defines positive impact finance as that which serves to finance positive impact business. It is that which serves to deliver a positive contribution to one or more of the three pillars of sustainable development (economic, environmental and social) once any potential negative impact to any of the pillars have been identified and investigated.
Principle Two, on frameworks, exhorts entities (financial or non-financial) to have adequate process, methodologies and tools to identify and monitor the positive impact of the activities, projects, programmes, and/or entities financed or invested in.
Principle Three asks the entities to provide transparency and disclosure on the following: (1) The activities, projects, programs, and/or entities financed considered and intended positive impact; (2) The processes they have in place to determine eligibility, and to monitor and to verify impacts; and (3) The impact achieved by the activities, projects, and programs, and the entities financed. The intended use of funds released via financial instruments and their intended contribution should be clearly marked on the corresponding documentation.
Finally, Principle Four recommends that assessment be based on the actual impact achieved. The assessment can be internally processed, i.e. for internal monitoring and evaluation purposes, or undertaken by qualified third parties (e.g. auditing companies, research-providers and rating agencies), for certification and/or rating purposes.
The basic rationale for these principles is the realization that it is not enough to just change gears towards forward-looking risk management approaches like scenario analysis and stress testing approaches.
Whereas previously the tack was to mitigate the risks, this time it is to identify clear solutions. The challenge is to focus on growing the pool of finance available to deliver positive impact.
As The Economist aptly puts it, “cutting emission will not be enough to keep global warming in check. Greenhouse gasses must also be scrubbed from the air.” This is an example of taking clear actions to
achieve a positive effect, not just to ensure that actions taken will have less negative outcomes.
The principles are designed to grow the financing of sustainable development solutions by making the finance industry a catalyst for change. The importance of clearly setting measurable targets ensures that outcomes will stand validation and scrutiny. It is consistent with the mindset that what we cannot measure, we cannot control. It is a pro-active approach that puts substance to what UNEP-FI aims about changing finance by adopting a precautionary approach to environment and social issues.