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Private sector efforts and initiatives on environmental, social and governance factors

Investor incentives often tend to not be aligned with environmental, social and governance (ESG). Sustainable or green investments should , in theory, be attractive to long-term funds, since the risks associated with climate change are a potential long-run liability. However, the short-term nature of investment horizons sometimes impedes the incorporation of longer-term environmental risks into firms’ risk/return analysis. In addition, the environmental effects of business activities tend to be ‘externalities’, meaning that they are the side effects or consequence of commercial activity that are not reflected in the cost of the goods or services involved. This is the case with carbon emissions, making it unlikely that many firms individual firms will value their carbon emissions on their own. Policies to address this include measures to ensure companies internalize externalities (e.g. through taxation) and direct regulations. In addition, sustainable development goal (SDG) 12 encourages companies, to adopt sustainable practices and to integrate sustainability information into their reporting cycle. The Addis Agenda takes this further and encourages greater accountability by the private sector to embrace business models that have social and environmental impacts, and that operate sustainably. Private sector efforts and initiatives are an integral part of the Addis Agenda, and essential to the achievement of the 2030 Agenda.

Reporting

Reporting on environmental, social and governance impacts is a first step in better aligning private investment with sustainable development. More than 92 percent of the world’s 250 largest companies report on their sustainability performance in one form or another. In addition, more than 2,000 businesses in 90 countries adhere to the guidelines of the independent standards organization, the Global Reporting Initiative (GRI). Over the past 15 years, there has been a sharp increase in the number of companies producing sustainable reports in accordance with GRI guidelines. 

Benchmarking
At present, there is no effective mechanism for individual investors, civil society and governments to hold companies to account for investing in and promoting good corporate performance on sustainable development. Consequently, there is not enough pressure on companies, either from investors or society at large, to improve their corporate sustainability performance. As a result, there has been a proposal is to create a set of publicly available, corporate sustainability benchmarks that rank companies on their performance across a range of indicators such as climate change, gender, access to health care and other key aspects of the SDGs. This would provide transparent information to investors and civil society and investors.
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As a follow-up, a coalition of actors are collaborating to establish the ‘World Benchmarking Alliance’ as a publically funded, pre-eminent global institution that funds, houses and safeguards quality of SDG related corporate benchmarks. The coalition draws on public sector experience through the British and Dutch governments, a range of corporates and investors through the Business & Sustainable Development Commission, deep corporate benchmarking expertise through Aviva, Index Initiative and the Corporate Human Rights Benchmark and civil society representation through UN Foundation.

Principles

The Principles for Responsible Investment (PRI) are six voluntary and aspirational investment principles that offer a menu of possible actions for incorporating environmental, social and governance (ESG) issues into investment practice. PRI currently has nearly 1600 signatories, from over 50 countries, representing USD 60 trillion of assets under management. Its 6 principles include pledges by signatories to: i) incorporate ESG issues into investment analysis and decision-making processes; ii) be active owners and incorporate ESG issues into their ownership policies and practices; iii) seek appropriate disclosure on ESG issues by the entities in which they invest; iv)  promote acceptance and implementation of the Principles within the investment industry; v) work together to enhance their effectiveness in implementing the Principles; and vi) report on their activities and progress towards implementing the Principles.
The Principles do not have minimum entry requirements or absolute performance standards for responsible investment. PRI signatories are not necessary engaged in impact investing. However, signatories have an obligation to report on the extent to which they implement the Principles through the annual Reporting and Assessment process.
Impact investments

Impact investments are investments with the intention to generate social and environmental impact alongside a financial return. The growing impact investment market provides capital in sectors such as sustainable agriculture, clean technology, microfinance, and affordable and accessible basic services including housing, healthcare, and education. Impact investments are undertaken by a range of organisations including institutional investors (fund manager, pension funds, and insurance companies), development finance institutions, banks and foundations. 
Given that impact investing is a relatively new approach, the market size for it has not yet been fully quantified. However, figures supplied by the Global Impact Investing Network (GIIN) indicate that the market is expanding. In total, 156 organizations (including fund managers, foundations, banks, development finance institutions, family offices, pension funds, and insurance companies) committed more than USD 15 billion to impact investments in 2015, and planned to commit 16 per cent more capital in 2016.
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In total, as of the end of 2015, investment managers had USD 77.4 billion in impact investing assets under management, largely by fund manager, but also by development finance institutions (DFIs).  The Financial Times “Investing for Global Impact” 2016 survey among family offices and family foundations revealed that of the 182 respondents, 26 per cent invest in grant-making only and 36 per cent in both impact investing and grant-making. This report is now in its third year, so comparative data across this period is now possible. It has identified the gradual but steady increase in family office respondents active in impact investing (60 per cent in 2016 compared with 53 per cent in 2013) and the slow shift to consider financial returns alongside social returns.
Organizations managing 92 per cent of these assets are headquartered in developed countries, with roughly half the assets are allocated to emerging markets. The top geographies in terms of amount of capital allocated are North America, Sub-Saharan Africa, and Latin America and Caribbean. Over 40 respondents planned to increase allocations to Sub-Saharan Africa during 2016, 30 planned to increase their capital allocated to East and South East Asia, 25 to South Asia and 23 to Latin America and the Caribbean.
The OECD has played a role in the global social impact investment (SII) initiative launched in 2013 during the U.K. Presidency of the G8 with a Phase I report published in 2015. Phase II of the OECD social impact investment work has expanded to include both developing and developed countries under the framework of the SDGs. Several work streams exist, including one focused on developing a global standards reporting framework for social impact investment data (transaction and performance data, both financial and social).