In July this year, at the invitation of the UK’s G7 Presidency, the Impact Taskforce was formed to answer the pressing question: “How can we accelerate the volume and effectiveness of private capital seeking to have a positive social and environmental impact?”
Over 120 leading voices from the worlds of business, investment and public policy, representing over 100 institutions across 40 countries, came together to analyze and identify ways of financing a just transition to a climate-secure future for all. The resulting report, entitled Time to deliver: mobilising private capital at scale for people and the planet, provides actionable recommendations to answer that core question. It sets out the steps that can help countries around the globe to mobilize private investment in support of commitments made towards a net-zero world that leaves no one behind.
The publication is not the end of the road but the beginning. It is now time for global leaders to step up and deliver on high-level, long-term commitments to change.
At the heart of the report are recommendations to increase transparency, integrity and harmonisation of standards in relation to impact and step up the supply of structures and financial instruments that can channel private capital at scale into investments that do public good. They include:
· Mandatory accounting for impact by businesses and investors to harmonised standards, recognising the central role of transparency and integrity in changing behaviour and driving investment flows.
· Support for the efforts of the International Financial Reporting Standards. Foundation’s International Sustainability Standards Board (IFRS-ISSB) to create a global reporting “baseline” on impact related to enterprise value.
· Increasing the supply of investment vehicles suitable for institutional investors, empowering multilateral development banks and development finance institutions to be more effective in catalysing mobilisation of private investment, with particular focus on emerging economies where the funding gap is greatest.
· Driving alignment across public and private actors and ensuring that more capital meaningfully contributes towards a Just Transition, by putting forward three Just Transition Elements that provide a common foundation for action to deliver a transition to Net Zero that leaves no one behind.
Mobilizing private capital
The need is urgent. Today, we are just eight years away from 2030, the deadline for achieving the Sustainable Development Goals which aim to achieve a better and more sustainable future for all. It will be a moment of great global accountability, and one which the current generation of political and business leaders must address. The gap between rhetoric and delivery needs to narrow visibly and show momentum towards pledges on climate action, global goals and building back a better world. The risks of failure to deliver are not abstract notions but tangible dangers. Those poorest communities in emerging economies are among those at greatest threat, but people across the globe can readily see the effects of climate change and growing inequality in their own backyards.
There will never be enough public money to tackle the challenges we face. Increased global debt levels following COVID-19 have exacerbated the situation. In 2020, developing economies suffered an estimated additional $1.7 trillion shortfall in funding to meet the SDGs, according to research from the OECD. The limitations of public finances are evident at the country level. Kenya estimates that it requires $62 billion annually to implement its climate-linked Nationally Determined Contributions, although its public resources can only cover 13% of this figure.
The mobilization of private investment and innovation for public good is mission critical. The good news is there is an abundance of capital in investors’ hands. Global investable assets are estimated at $250 trillion, more than enough to tackle critical environmental and social issues. There is also growing demand among individuals and investors for more ethical products, services and practices. Across the world, we are seeing spectacular growth in ESG assets and intentional impact investment. On the supply side, we have seen a response, not least in the extraordinary growth of sustainability-linked bonds. And there continue to be huge leaps in digital technology that make it easier for impact entrepreneurs to deliver and measure positive impact, while generating good financial returns.
Breaking down silos
We should not underestimate the challenges, however. System inertia remains strong. We must create the right conditions for capital to flow with urgency, scale and integrity into investment opportunities that meet risk-adjusted return requirements and have a positive impact on public goals. That is what the taskforce – with the support of the Global Steering Group for Impact Investment, working with its UK member, the Impact Investing Institute – has sought to do.
What we don’t measure, we don’t manage or value. So, the report sets out actionable pathways to a future in which investment decisions are taken through the triple lens of risk, return and impact. This is a journey to transform the quality and transparency of information on the impact of investment decisions. We believe that meaningful impact transparency is a powerful tool to change behaviour, encourage a race to the top, and redefine what success means for companies and investments. We urge governments to create mandatory and harmonised disclosure standards for companies and investors.
Our starting point is to give strong support to the IFRS Foundation’s International Sustainability Standards Board work on a globally harmonised baseline on impact related to enterprise value. We encourage all G7 countries to support these efforts as they can lead to greater transparency, efficiency, and accountability. The taskforce also asks that countries unite to urgently build on that baseline to include impact on all stakeholders. In addition, we call on the G7 and partners to support ongoing cross-sector collaborations to deepen our understanding of how to value impact effectively, allowing comparisons between companies, and making connections between impact and profit.
We also focus on creating more opportunities for mainstream institutional investors to invest for return and positive impact in support of the global goals and a just transition to net zero that does not leave people behind. The taskforce is calling on G7 members to use their powers to amend the mandates of multi-lateral development banks and development finance institutions to enable those institutions to be more effective in supporting the mobilisation of private capital. This includes more use of proven mechanisms for adjusting risk, such as guarantees, and more resources allocated to project and policy development that will increase the flow of investable projects in emerging economies.
The Taskforce makes a powerful case for avoiding silos forming between social and environmental objectives. Again, in the spirit of contributing actionable pathways, the report seeks to give a better definition to the concept of investing in support of a Just Transition. This includes a proposal for Just Transition Elements built on three main pillars: Climate and Environmental Action; Socio-Economic Distribution and Equity; and Community Voice. Their aim is to help institutional investors build an understanding and confidence in “what good looks like” in both new and existing vehicles.
We have strong tailwinds to challenge system inertia, align interests and move large pools of mainstream institutional investment to be a more visible part of the solution. This will require sustained commitment and acceptance of the need to work in less fragmented ways and develop new models of partnership. The worlds of business and politics need each other more than ever. A network of G7 leaders, regulators, business executives, and non-governmental organisations are uniquely positioned to accomplish the task.
We are at an inflection point. The way ahead is not without challenges, but it is obvious and well signposted. It is time to deliver.
Nick Hurd is a former U.K. MP and government minister, and chair of the Impact Taskforce.