As the world fights its way out of the COVID-19 pandemic, the realization that we can no longer pursue profit without considering the environmental and social impacts generated by investments is increasingly clear.
S&P analysis found that funds integrating environmental, social, and governance factors outperformed the S&P 500 average of 27.1%, rising between 27.3% and 55% in the year following the World Health Organization’s official declaration of a pandemic. At the same time, the United States, the world’s largest economy, suffered $95 billion in damages from climate-related catastrophes alone in 2020.
Before the pandemic, corporations and investors were already starting to integrate ESG factors into their decision-making processes. In 2017, McKinsey reported that over one-quarter of assets under management globally were being invested on the premise that ESG factors can materially affect a company’s performance and market value.
Today’s economic system needs to go beyond this. If we want to build back better and greener in low-income countries, financial risk reduction is no longer sufficient.
All organizations that deploy resources for the Sustainable Development Goals need to go beyond risk mitigation, and toward managing for development impact. This entails embedding impact into the investment strategy, management system, and governance system, as well as being transparent about decision-making processes and the development results achieved.
After ten months of intense debate and consultation, the Development Assistance Committee of the Organisation for Economic Cooperation and Development approved the OECD-UNDP Impact Standards for Financing Sustainable Development on March 26. Their decision is not only an important landmark for the DAC but indicative of the seismic changes taking place in the world of sustainable finance.
The standards are designed to help donors, Development Finance Institutions, and asset managers integrate impact considerations into investment practices and decision-making, with a view to assessing both positive and negative effects on people and the planet, as well as transparently reporting on impacts.
Society is increasingly asking for more transparent reporting on how development resources are used and the development impacts they generate. Transparent reporting is a major missing piece of the puzzle.
—The standards seek to address a rising tide of criticism from both civil society organizations and experts regarding the use of development finance.
The first challenge is the need to keep a tight focus on the development mandate. The primary mandate of development finance, whether private or public, is to generate positive outcomes for those most in need in the partner country.
Likewise, DFIs have a dual mandate that includes the creation of financial returns, alongside tangible development results. However, due to the lack of incentives and control systems, the development pillar of this dual mandate is sometimes side-lined, and investments are made more on the basis of their risk-return profile, rather than their potential for development impact.
The standards aim to tackle this problem, through the inclusion of ambitious provisions for embedding human rights considerations and local development needs in decision-making, under the overarching central imperative of leaving no one behind when deploying resources for the SDGs.
The second key issue for the development sector is transparency. Society is increasingly asking for more transparent reporting on how development resources are used and the development impacts they generate. Transparent reporting is a major missing piece of the puzzle.
Reporting standards are emerging, but have yet to be harmonized, while reporting remains largely at the discretion of the businesses themselves. However, simply reporting ESG and SDG impact is not enough.
We need detailed, verified, and comparable impact information that investors can analyze together with profit. Harvard Business School’s Impact-Weighted Accounts Initiative shows the way forward. It has implemented impact accounting frameworks and quantified in dollar terms the impacts of thousands of companies. The approach can help investors better link their decisions with the achievement of the SDGs.
The adoption of the standards is a demonstration of the public sector taking a stance to improve transparency and accountability around how resources are invested to achieve the SDGs. Although we know that impact performance and financial performance are inextricably linked, corporations and investors around the globe are not yet obligated to report transparently on social and environmental impacts.
Across Europe and the globe, regulation is heading towards full transparency and accountability. Initiatives such as the European Union’s new sustainable finance disclosure regulation and the revision of the non-financial reporting directive show that investors and corporates will be increasingly held to account for the positive and negative impacts they claim to have on people and the planet.
The standards push public and private investors to be more transparent on both their internal decision-making processes and on the development results that they have achieved, pushing for a transparent reporting system.
The standards are freely available for use by public and private investors seeking to improve their impact strategy and management process, on the one hand, and their impact transparency and governance, on the other. Detailed implementation guidance — currently being developed to support the practical implementation of the standards — address challenges and provide best-practice examples.
The guidance will also be invaluable for investors seeking independent verification of their practices. Verification is crucial — impact reporting without independent verification is simply marketing.
ESG and SDG impact transparency and accountability is the only way to achieve the SDGs. The DAC’s approval of the standards is an early milestone. The ability of these standards to improve transparency and prevent SDG-washing depend on their widespread implementation, which we should be able to assess in about a year.
In turn, achieving widespread implementation is dependent on incentives. We call on donors, DFIs, and asset managers to urgently implement the standards, share practices, and inspire one another to improve lives and the planet through their impact.
About the authors
Sir Ronald Cohen
Sir Ronald Cohen is a pioneering philanthropist, venture capitalist, private equity investor, and social innovator. He is recognized as the father of impact investment and European venture capital and is driving forward the global Impact Revolution. He serves as chairman of the Global Steering Group for Impact Investment, the Impact-Weighted Accounts Initiative at Harvard Business School, and The Portland Trust. He is a co-founder and former executive chairman of Apax Partners Worldwide, a global private equity firm. He is also co-founder of Social Finance UK, USA, and Israel, co-founder Chair of Bridges Fund Management, and former co-founding chair of Big Society Capital. He is the author of “IMPACT: Reshaping Capitalism to Drive Real Change.”
Jorge Moreira da Silva
Jorge Moreira da Silva has been the executive director of UNOPS since April 2023. He has over 20 years of experience working on climate change, energy, and environment in the public and development sectors. He was previously the director of the Development Co-operation Directorate at OECD and Portugal’s minister for the environment, territorial planning, and energy, among other roles.
