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 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 18 years, there has been a sharp increase in the number of companies producing sustainable reports in accordance with GRI guidelines.
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 is 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 such as climate change, gender and access to health care. 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 Foundations.
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 1714 signatories from over 50 countries. Asset owners who are signatories to the PRI hold a total of $16.3 trillion in assets under management as of 2017. 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.
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 managers, pension funds and insurance companies), development finance institutions, banks and foundations.
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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, 205 organizations (including fund managers, foundations, banks, development finance institutions, family offices, pension funds, and insurance companies) committed more than $22.1 billion into nearly 8,000 impact investments in 2016, and planned to commit 17 per cent more capital in 2017.
In total, as of the end of 2016, investment managers had $113.7 billion in impact investing assets under management, largely by fund manager (over 50 per cent). Pension funds and insurance companies increased assets under management significantly, from $2.6 billion in 2015 to $21.6 billion in 2016.
A large majority (82 per cent) of respondents are headquartered in developed countries. The top geographies in terms of amount of capital allocated are US and Canada (40 per cent), Western, Northern, and Southern Europe (14 per cent), Sub-Saharan Africa (10 per cent), and Latin America and Caribbean (9 per cent). Over 30 respondents planned to increase allocations to Sub-Saharan Africa in the following year and another 17-25 respondents planned to increase their capital allocated to each of South Asia, Southeast Asia and Latin America and the Caribbean.
The Financial Times “Investing for Global Impact” 2017 survey among family offices and family foundations revealed that of the 246 respondents, 23 per cent invest in philanthropy only and 45 per cent in both impact investing and philanthropy. This report is now in its fourth 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 (67 per cent in 2017 compared with 53 per cent in 2013) and the slow shift to consider financial returns alongside social returns.
The OECD has played a role in the global social impact investment (SII) initiative launched in 2013 during the UK 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 standard reporting framework for social impact investment data (transaction and performance data, both financial and social).