21 October 2019
A tool being devised by UNEP FI will help assess corporates' impact on the SDGs, says Careen Abb
Analysing and managing impact in corporate finance and investment is critical in order to achieve the Sustainable Development Goals (SDGs). The UNEP FI Positive Impact (PI) Initiative will release in the Fall an innovative prototype for corporate impact analysis, specifically designed for finance and investment with unspecified use of funds and proceeds.
Thinking about financing the SDGs, one sooner or later appreciates the importance of mainstream finance, run-of-the-mill bank corporate lending, corporate equity and debt investments.
This is, primarily, a matter of volume: corporate finance represents the bulk of global capital markets. At the core of our economies, corporate finance supports established companies that have the know-how, distribution systems and balance sheets to scale and increase access to critical and impactful products and services.
In many ways, this is the elephant in the 'impact room': impact finance has mostly focused on specific activities and projects, disruptive ventures, and impact-focused small businesses to date, but it's impossible to envision large-scale impact without a hard look at mainstream corporate activity and financing, and how these will evolve to deliver the SDGs.
This leaves banks and investors with the need to find ways to analyse and manage impacts in the context of general corporate financing and investments, where the use of funds and proceeds is unknown, and corporate business strategy as a whole therefore needs to be understood.
The good news is that their appetite is growing. Investors are increasingly vocal and active about the need for solutions to understand and drive corporate impact, as reflected in the emergence of dedicated analysis methodologies and taxonomies.
With its new tool for impact analysis due for release in Fall 2019, the PI Initiative can help.
The Initiative has long advocated that mainstream business impact analysis and management is central to achieving the SDGs. The core of the approach it has developed is to start with the end in mind: the impacts to be achieved and those to be avoided, and to treat these together – holistically – as opposed to in silos. This is the essence of the Principles for Positive Impact Finance, released in 2017 as a framework to finance and achieve the SDGs (more on this holistic approach in a recent editorial in Environmental Finance.)
In 2018, the Initiative released a first set of guidance for holistic impact analysis: the PI Impact Radar translates the SDGs into distinct objective and impact areas applicable for impact analysis. PI Model Frameworks provide guidance on applying holistic impact analysis across different financing products and asset classes. To date, PI has released frameworks for corporate finance, project finance, and real estate.
Since the beginning of 2019, new PI working groups have been digging deeper into impact analysis solutions.
One such group has focused on corporate finance and investments – any financing with unspecified use of funds. Working group participants collaborate to test and apply the dedicated PI Model Framework to a sample of companies and sectors. Where the Model Framework proposed high-level guidance, the working group is developing a template with a refined workflow and additional input data, in order to form a comprehensive analysis tool, as follows.
We begin with an identification stage, looking at the specific activities and business lines of a company, as well as the geographies in which it operates. We also consider the systemic importance of this company's activity for a given sector or impact area. For example, a company like Shell has the power to radically impact the level of global carbon emissions by moving away from fossil fuels, whereas other companies, smaller or in less relevant sectors, might not. Via a sector-to-impact map (based on the PI Impact Radar), we then identify the companies' significant impact areas.
We continue with the assessment stage. This involves an appraisal of the company's governance of impacts: is the business set up to manage its impacts? Assessment also involves a review of the company's impact performance: what do we know about the company's actual impacts, what indicators and metrics are available?
At the end of the process, analysts can determine the impact profile of a company: whether it has significant positive impacts and duly manages its negative ones; whether the company doesn't have significant impacts yet, or doesn't manage its negative ones, but could do so; whether its core business has negative impacts that cannot be avoided, mitigated or compensated.
The aim of the analysis is to define the corporate's impact status and potential. The idea is not to exclude but rather to understand where the corporate is on the journey, and how it might be taken onwards.
Lastly, the tool includes a monitoring feature. Companies evolve, sometimes rapidly: they create new products, retire old ones, enter new markets, or their negative impact mitigation efforts might show increasing results. Companies might also make new data available. This makes monitoring, a review of impact identification and assessments, a critical element to ensure that analysis remains accurate and that results are being achieved over time.
"The idea is not to exclude but rather to understand where the corporate is on the journey and how it might be taken onwards"
What sets the PI approach and this new tool apart is its context-based and holistic nature. The consideration of both negative and positive impacts provides a fuller picture of companies' contributions to the SDGs, making it a better decision-making tool. The tool fully integrates economic (hence developmental) considerations alongside the environmental and social dimensions, which are often left out in impact or ESG analysis.
Ultimately, by virtue of this holistic approach, and by providing the data architecture to do so, the aim is to provides a complete, coherent and more inclusive view of where impacts are in the economy, how companies can bring positive impacts closer to their core business models, and how economies can be transformed to be more impactful. In doing so, it also equips financial institutions with the means to build their impact lens and strategy, improving their understanding of the links between business models and impacts, and providing them with a vehicle to achieve positive impact portolios.
The tool will be released as a prototype. We invite stakeholders to join us in further testing, strengthening and co-constructing the tool.
Stay tuned and learn more about PI at www.unepfi.org/positive-impact
Careen Abb is a programme leader for Positive Impact Finance at the United Nations Environment Programme Finance Initiative (UNEP FI)