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 15 years, there has been a sharp increase in the number of companies producing sustainable reports in accordance with GRI guidelines.
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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.
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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).