Some quick definitions to start:
Holistic approach: the practice of looking at sustainability issues (climate change, access to services, development, etc.) together, rather than individually. It implies an understanding of both positive and negative sustainability impacts.
Three pillars of sustainable development: a common expression to describe the environmental, social and economic dimensions of sustainable development.
What’s the Positive Impact Initiative?
Positive Impact, or “PI”, was created by and for financial institutions to address the SDG financing gap – an annual US$ 2.5 trillion. The Positive Impact Initiative works with banks, investors, corporates and the public sector to foster a new set of private-sector, impact-based solutions to the SDGs. On the finance side, we’re helping institutions understand the strategic importance of the SDGs and prepare for an impact-based approach to doing business. On the demand side, we’re looking at how public actors, who by and large remain in primary charge of delivering SDG-related outcomes such as housing, mobility, education or healthcare, can challenge the private sector to develop tailored business solutions by issuing impact-based requests for proposals and achieving best cost to impact ratios.
Sounds intriguing and exciting? Read the Manifesto.
The Positive Impact Initiative is:
- A new approach: impact-based business and finance
- A tool: the Principles for Positive Impact Finance
- A platform for collaborative work and learning among peers and with stakeholders
- Building on existing standards and best practice such as the Equator Principles, UN Guiding Principles on Business and Human Rights, Green Bond Principles, etc.
- Working with other sustainable finance networks (e.g. PRI, UN Global Compact)
But it is not:
- Not a reporting framework
- Not a certification body
- Not a match-making platform between entrepreneurs and investors
There are many SDG finance initiatives nowadays. What makes Positive Impact different?
With the SDGs, we finally have a frame of reference that addresses all dimensions of sustainable development (economic, environmental and social). It is also a frame that can be used both by the public and private sectors. As a result, many financial actors want to explain how their work contributes to the SDGs, and look for ways to scale-up their contribution. Contributing to the SDG, however, is neither the same as meeting the SDGs’ targets, nor the same as bridging the financing gap for the SDGs. The Positive Impact Initiative is aiming to meet the SDGs and bridge the financing gap by promoting the idea that new lines of business and impact-based business models need to be developed and financed. We call this impact-based business and finance.
Please refer to Rethinking Impact to Finance the SDGs for more on this.
What’s the difference between Positive Impact finance and impact investing?
In short, Impact investments may fall under the Positive Impact finance umbrella, but PI finance is not limited to impact investing.
The GIIN defines impact investments as “investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return”. Meanwhile, Positive Impact Finance is defined in the Principles for Positive Impact Finance as finance that “contributes to one or several of the three pillars of sustainable development: economic, environmental and social, once any potential negative impacts to any of the three have been duly addressed (avoided, mitigated or compensated.” The Principles for Positive Impact Finance set requirements for a holistic approach: appraisal of both positive and negative impacts, consideration of all three dimensions economy, society and environment, and have transparency on methodologies as a core requirement. According to the GIIN, impact investing can target a range of returns from below market to market rate, depending on investors’ strategic goals. Positive Impact finance on the other hand, is designed for investors and actors with commercial strategies.
Finally, impact investing has traditionally focused on the role of investors (owners and asset managers). Positive Impact extends to banks and other financiers, because impact is also a matter of origination, not just of investment, and can – and should – be pursued, across the spectrum of financial products and services.
It is therefore perfectly possible for impact investors to adopt approaches that are consistent with the PI Principles.
Ok, I get it. Do you have examples of banks or investors using impact-based approaches?
This is still an experimental space. The members of the Positive Impact Initiative are working on applying the approach to various financial products and investments. For example, Société Générale has issued positive impact bonds.
We are in the process of developing product-specific guidance for those who would like to apply an impact-based approach. We expect to publish our first guidance notes in the fall of 2018.
Interested in the impact-based approach and delivering products that are consistent with the Principles for Positive Impact Finance? Are some of your products or processes already partly aligned: join us and let’s work together.
Why should I become interested in impact-based finance? what’s in it for me?
Using an impact-based approach is a strategic tool to understand and navigate momentous technological, economic changes and growing social and environmental pressures. Under the circumstances, it’s becoming crucial for business and finance both to understand impact, as well as to have the tools to deliver positive impact.
Impact-based finance is also a way to respond to increasing regulatory scrutiny and momentum, as attested by the constitution of the Taskforce on Climate-related Financial Disclosures (TCFD) or High Level Expert Group (HLEG) in Europe, and sustainable finance roadmaps in several countries.
For originators, impact-based financing tools provide a unique solution to anticipate and address the demands of the growing ranks of investors with sustainability policies.
For investors, using an impact-based, holistic approach, can help narrow the number of tools used across an organization to manage risks and identify positive impacts.
What are the Principles for Positive Impact Finance and what happens if I endorse them?
The Principles are a tool to help banks and investors adopt an impact-based approach, so they can step up their positive impact on the economy, society and the environment, and, more specifically, actively participate in bridging the financing gap for sustainable development.
Endorsing the Principles is a commitment to working collaboratively with initiative participants and to experiment with impact-based approaches, ultimately leading to the delivery of Positive Impact products and services. In 2018, initiative participants are collaborating on implementation guidance, showing how to adopt the impact-based approach of the Principles in practice, in the context of different mainstream financial products and services.
Anyone wishing to participate in the Positive Impact Initiative is expected to endorse the Principles.
What are the reporting requirements for the Positive Impact Principles?
The Principles focus on products and services. Principle 3 specifically establishes the requirement for transparency. By endorsing the Principles, banks and investors commit to working towards impact-based analyses and to issue positive impact products. Accordingly, they are expected to communicate on the credentials of their specific PI products. At the time of issue, this includes methodologies (processes, decisions, criteria, assumptions) as well as expected impacts. Over time they should report on actual outcomes linked to their products. This can be done through regular channels such as investor documentation (e.g. for bonds), websites and sustainability reports.
How do the Principles relate to other standards and frameworks?
The PI Principles take a holistic approach to sustainable development (joint consideration of economic, environmental and social factors) and are intended for use by all segments of the finance sector. They have been designed as part of a broad agenda, with the distinct purpose of bridging of the SDG financing gap.
There are many available frameworks, from the Equator Principles to the Principles for Responsible Investment, to the Green Bond Principles and the Principles for Blended Finance. But these tend to focus on specific issue areas (e.g. climate change) or on specific segments of the market (e.g. project finance). Some can be considered building blocks for impact-based approaches and PI finance. For example, the Equator Principles and the underlying Performance Standards are a tool to understand negative impacts.
We have initiated a Global Alliance with the UN Global Compact and with the Principles for Responsible Investment to help synchronise our work programmes. Stay tuned for further partnership announcements.
How do the Positive Impact Principles relate to the UN Guiding Principles on Business and Human Rights (UN GPs)?
The Principles do not explicitly refer to human rights, but like human rights, they are positioned at the impact level. They also recognize the universality and the indivisibility of the 17 Sustainable Development Goals – this universality and indivisibility is likewise a core characteristic of human rights. The Principles clearly spell out that, to be considered ‘Positive Impact’, a financed activity and/or business must contribute positively to one or more of the three pillars of sustainable development (environmental, social and economic) while ensuring that negative impacts are identified and addressed across all three. This suggests that only financing activities for which due diligence – across the three pillars – has been conducted and acted upon could qualify as Positive Impact. Therefore, the application of human rights due diligence in conducting the negative impact assessment, building on the existing industry guidance for UN Guiding Principles implementation, is not only in line with, but also a determining factor for the quality and credibility of PI products and services.
A clarification of the human rights approach to SDG financing will be released in 2018 as we develop Positive Impact Guidance.
So how do I identify or tag positive impact in my portfolio?
Current mainstream approaches to financing sustainability tend to rely on pre-set taxonomies of qualifying sectors or activities. The challenge with this is that it limits the approach to those impacts that are directly aligned with sectors (e.g. renewables and emissions reductions) but fails to address other types of impact spread across multiple sectors (typically: social impacts), or not yet delivered by a dedicated, economically viable sector (for instance, energy efficiency, mobility, etc.). The point of the impact-based approach is precisely to overcome this limitation by going beyond tagging, and instead screen all assets directly for impact. By understanding and managing potential positive and negative impacts holistically and systematically, a more proactive and creative form of engagement can start to emerge between banks, investors and their clients/investee companies. Opportunities to reduce cost to impact will emerge, as well as ways to cover non-profitable impacts with impacts that are revenue generating.
In 2018 we released the PI Radar, a categorization tool to use as a starting point for impact -based analysis.
This holistic approach sounds somewhat daunting. How do I even get started?
Build on what you have: PI does not prescribe any single methodology to identify, use, monitor, and communicate/report and on impact. PI recognizes the diversity of players and needs in the financial sector. The approach builds on financial institutions’ existing expertise, whether that expertise is to address risks or to capture business opportunities. Financial institutions are expected to use their internal structures, frameworks and methodologies to analyse impact, and adjust or complete them as needed to fulfil the core requirement of the impact-based approach outlined in the Principles.
If you are interested in our approach and delivering products that are consistent with the Principles for Positive Impact Finance, if you think some of your products and/or processes may already be partly aligned: join us and let’s work together.
In 2018, we’re interested in seeing PI products hit the market. We’re developing Guidance Notes– we’ll clarify what it means to perform an impact-based analysis of underlying assets and counterparties for a range of different products and share lessons learned on product launches. We’ll look at the kinds of teams and processes needed to implement an impact-based approach and how to engage with clients and investee companies. We’ll also develop the PI Impact Categorization, to use as a starting point for impact analysis.
Join us and be part of a group of first movers to get a head-start in understanding and mastering the transition to impact-based business.
Understanding and managing both positive and negative impacts sounds great but doesn’t it seriously constrain your universe?
No. Understanding both positive and negative impacts, as proposed with this holistic approach does not imply a restriction of product or investment opportunities. Rather, it allows banks and investors to discover and develop opportunities they may have ignored, had their only focus been on managing ‘ESG’ risks, or on structuring specific themed products and services. The open, impact-based approach of the Principles provides the added benefit of being able to address a variety of impacts via a single framework.
The PI approach is pragmatic: its goal is to build on existing skills and processes in order to deliver more positive impact. Initiative participants are working on implementation guidance for different mainstream financial products and services with the understanding that financing products may mean different levels of access to information and leverage, also depending on underlying assets.
Look for more information via our Model Frameworks released in 2018.
Will issuing Positive Impact products cost more money than “regular” products?
References to transparency and assessment (Principles 3 and 4) occasionally raise concerns about the cost of applying the Positive Impact Principles. Third party verification and second opinions are not required by the Principles. They can however, help make a product more credible, especially for first issuances. The key is transparency – in relation to the methodologies used, the assumptions and decisions made. This is what will give investors and stakeholders at large the information to judge whether their sustainability criteria are being met.
Will UNEP FI certify my PI products?
No. UNEP FI is not a certification or verification body. However, financial and extra-financial rating agencies and auditors are involved in the development of the Guidance Notes to the Principles (to be released starting in late 2018). They are also working with the initiative to better understand how Positive Impact can become embedded in their work. Meanwhile, the PI Secretariat and initiative members can provide interpretative guidance for the implementation of the Principles as a benefit to initiative participants.