Beats | November 26, 2018

Tools for optimizing impact help investors identify risks and opportunities

Dennis Price
ImpactAlpha Editor

Dennis Price

Targeting, measuring and managing social impact can illuminate other investment factors as well. Some new tools generated by the cottage industry of global agencies and associations can help investors use impact analysis to manage risk, generate dealflow and spot opportunities.

“Impacts can be used as a starting point for business models and generate revenues,” suggests a new report from Positive Impact Finance, a program of United Nations Environment’s Finance Initiative. “Rethinking Impact to finance the SDGs” outlines an approach the authors say “can reduce costs, address certain risk issues and catalyze private sector solutions.”

In the automobile industry, for example, a demand for mobility rather than ownership of expensive cars is driving a transformation of the sector. A focus on delivering “people needs,” like mobility, energy access and efficiency, good jobs, education and healthcare – rather than a simple focus on selling products – could help turn “impact” into financial revenues and dramatically shrink that cost of achieving the U.N. Sustainable Development Goals, say the authors.

Positive Impact Finance also released tools to turn the ideas into practice. The PI Impact Radar, for example, identifies the set of sustainable development and human needs that underpin the Sustainable Development Goals, to help investors identify investable activities, projects, programs and other “impact” opportunities.

The PI Model Frameworks provide a set of “how-to” guides for holistic impact analysis and management for financial products that fund specific projects as well as products such as equity and general purpose loans and bonds that support a company overall.

Natural risk

The Natural Capital Finance Alliance, a finance sector-led initiative, says investors don’t need to care about the environment to care about their risk exposure as the depletion of land, oceans and forests accelerates. The group has developed an online tool, dubbed ENCORE (Exploring Natural Capital Opportunities, Risks and Exposure), that helps investors quantify how much the companies they lend to, or invest in, depend on ‘natural capital’ such as ground water, coral reefs and forests.

“Valuation of natural capital has the potential to support decision-making in relation to both our own operations and our portfolio, says Kim Farrant of VicSuper, the $15 billion Australian superannuation and pension fund. Valuing natural capital, says Farrant, “will enable us to measure our use of natural capital, our impact on natural capital and the value generated for our fund and stakeholders through the transformation of natural capital.“

Using Encore, for example, the Alliance found that 13 of the 18 sectors that make up the FTSE 100 index have a total of $1.6 trillion in market capitalization to production processes with “high” or “very high” material dependence on nature. The tool, based on the production processes for 167 economic sectors, found agriculture, aquaculture and fisheries and forest products most dependent on natural capital; utilities, oil and gas and mining also highly exposed.

Such analysis, says Yes Bank’s Namita Vikas, “will not only enable financial institutions to easily identify and mitigate the impact of natural capital risks, but also help to mainstream natural capital considerations in decision-making processes.”