Impact Investment & the Role of SDGs, Global Standards and Regulation

© Alexandre Caron

“Considering the urgent need to scale up environmentally sustainable investments to successfully deliver on the objectives of the Paris Agreement and the UN 2030 Agenda on sustainable development goals (SDGs)“. This was the opening sentence of the Joint Statement on the International Platform on Sustainable Finance (IPSF) foundation on 18 October, 2018.

The objective of the platform is to underline the critical role the financial sector needs to play to reorient private investments toward sustainable activities worldwide, as provided by article 2.1 (c) of the Paris Agreement or under Sustainable Development Goal 17, in addition to public funds.

One of the crucial aspects of sustainable investments is to make sure that various terms and definitions are used by market participants (investors, asset managers, advisors, etc.), regulators, academics and other stakeholders in the same way.

As outlined in a commentary co-authored by Timo Busch (University of Hamburg) and other authors* titled “Impact Investments: a call for (re)orientation” a new typology of sustainable investments was presented. At the core of the impact investment definition is an emphasis on “transformational changes”.

Impact investment should not be used interchangeably with ESG as the transformational change is not so much the focus in ESG strategies. The risk of “impact washing” exists.

The framework presented in the commentary classifies sustainable investments as follows:

Sustainable Investments
– ESG-screened investments (mitigation of ESG-related risk and/or ethical considerations)
– ESG-managed investments (systematic reflection on ESG-related risks and opportunities)

Impact-related Investments
– Impact-aligned investments (address social and environmental challenges and goals)
– Impact-generating investments (actively contributing to social and environmental solutions and transformations

Impact-aligned investments apply a comprehensive set of inclusion criteria and combine at least one pre- and one post-investment decision approach, impact-generating investments may use different strategies (Timo Busch).

Output: Results that can be measured

For impact-aligned investments, materiality is provided through detailed description of already realized outputs via benchmark analysis or the level of SDG alignment. Outputs are defined as the results of an investment strategy that can be measured. For an impact-generating strategy an apparent causal effect is required.

The Relationship of SDGs, Global Standards and Regulation

The role of SDGs for impact investment strategies is very important. The objective of various global standards – non financial reporting and others – is to create frameworks to foster sustainable investments (SASB, GRI, TCFD, NFRD, SFDR, CFA Institute ESG Disclosure Standards for Investment Products, etc.).

Regulation in various jurisdictions also aims to redirect investments in such a way that it supports the sustainable financing of the economy. The focus of regulation can be companies, investment products, benchmarks or data and metrics

The big challenge ahead is the harmonization of regulation across jurisdictions. The International Platform on Sustainable Finance (IPSF) can play an important role here.

One example is the SFRD within the European Union which creates challenges for financial market participants and financial advisors as the technical details have not been finalized and published yet (expected within days). Asset managers and investors question if the planned disclosure requirements will be harmonized across Europe. Asset managers offering products in different European countries would very much welcome this. A lack of harmonization represents a substantial challenge and risk for them and will eventually reduce choice for investors and increase costs.

Alignment of investment strategies with SDGs will create benefits on all sides.

The question will also be where all the disclosure requirements will lead in practice? The ultimate goal of sustainability strategies is improvement of life, in the best case aligned with the UN SDGs.

Asset managers and product providers should therefore not get too much occupied with the technical details and complexities of regulation but also keep the broader picture in focus. Even representatives of the EU commission expressed the need “to do more” and “assess the impacts” of investment activities as part of a revised sustainable strategy. The SDGs provide a good guide over the years to come and alignment with the SDGs will create benefits on all sides.

* Impact investments: a call for (re)orientation (authors: Timo Busch, Peter Bruce-Clark, Jeroen Derwall, Robert Eccles, Tessa Hebb, Andreas Hoepner, Christian KLein, Philipp Krueger, Falko Paetzold, Bert Scholtens, Olaf Weber.

Further reference to articles:

SDGs: Implementation, Impact Measurement and Greenwashing|Charlotte Portiere|GRI 

More SDG articles can be found here.