What do we mean by “impact-based” business?

Impact-based business refers to a type of business model. In such an impact-based business model, the delivery of positive impacts is part of what drives the business model and creates financial value. In these business models, impacts are not externalities. In fact, the more positive impact is delivered, the more cash flow and revenue is generated. The two are therefore directly linked.

How does impact-based business and finance relate to the financial valuation of impacts?

Both aim to drive positive impacts and reduce negative impacts but approach the challenge in different ways: valuation seeks to do this by defining and assigning a value to externalities, whereas the development of impact-based business models circumvents the problem of costing externalities altogether by adopting business models where impacts are value drivers as opposed to externalities(as described above).

See more on the concept of impact-based business models in Rethinking Impact to Finance the SDGs, the paper that outlines our unique theory of impact.

Is impact-based finance the same as impact investing, sustainability-linked finance, or social impact bonds?

No. When we talk about impact-based finance we are really talking about the business model of the entity being financed or invested in. The terms impact investing, sustainability-linked finance and social impact bonds describe the financing and/or investment products or financing solutions themselves. They are not in contradiction: impact-based business models could in principle be served by impact investors, sustainability linked products or social impact bonds.

What about “positive impact finance”? Is all positive impact finance (as per the Principles for Positive Impact Finance) meant to be financing only impact-based business?

No. Positive impact finance is simply any financing or investment that “serves to deliver a positive contribution to one or more of the three pillars of sustainable development (economic, environmental and social), once any potential negative impacts to any of the pillars have been duly identified and mitigated”, as per the PI Principles.

This can be achieved by financing regular business models, not only impact-based business models. This broad definition purposefully enables us to engage with mainstream business and finance. In doing so,  the Principles can effectively promote impact from two angles: by improving the impact performance of current business models on the one hand, and by supporting new, impact-based business models on the other.

How can I validate my methodology and or my products as compliant with the Principles for Positive Impact Finance? Will UNEP FI provide certification?

UNEP FI is a standard setting body. It is not a certifying entity. Auditors can be called on to provide third party assurances on your methodology and/or a specific product. A set of Model Frameworks are available to provide guidance on how to align with the Principles in the context of corporate finance and investments with unspecified use of proceeds, and project finance. The UNEP FI Secretariat can be called on for further interpretative guidance. Prototype tools for impact analysis can also be referenced for guidance.

May I use the PI logo?

The PI logo can be used in the following cases:

  • Entities actively involved with the PI Initiative, for instance via a Working Group, can use the logo to communicate about their involvement (e.g. in presentations, reports, etc.)
  • Entities seeking to apply the PI Principles, for instance in their client analysis, or for product development, can use the logo to communicate about the Principles (e.g. in presentations, reports, product documentation), however the logo should not be used to indicate or suggest compliance with the Principles unless such compliance has been duly ascertained by an auditor (as outlined above).

KEY TERMS

Impact                                            

An impact is the effect or influence of one person, thing or action on another (New Oxford Dictionary).

Impact Areas                                    

Impact areas are the “themes” of the impacts, under the three pillars of sustainable development (economic, environmental, social). The impact areas used in this tool are based on the PI Impact Radar (PII, 2018).

Figure 1: Impact Radar

Source: Impact Radar, PII, 2018

Significant Impact Area                                

A significant impact area for an organisation is one where there is a strong correlation between the impact area and the organisation’ s current and/or future business, as a function of the type of company, the sector/s it belongs to and the countries it operates in. Understanding an organisation’s significant impact areas is key to ensure that actions are taken and targets are set in those areas where it can deliver the most positive impact and/or decrease the most negative impacts.

Impact Needs

Impact needs, are the environmental, social and economic needs of the countries in which the company operates. Understanding these is an integral part of impact identification and assessment.

Impact Identification                                    

Impact identification is the process by which a company’s significant impact areas are identified, as a basis for an assessment of its impact performance and impact management capabilities, and ultimately for the definition of its PI Status.

Company impact profile                                              

The Corporate Impact Analysis tool generates an impact profiles of the company. The profile provide an overview of significant impact areas based on the company’s typology, the sectors it supports and the countries it is operating in. Impact profiles do not reflect the company’s impact performance.

Impact Assessment                                       

In PII’s Impact Analysis tools, Impact Assessment is the process by which a company or bank’s capacity to manage their most significant positive and negative impacts, and its performance in delivering positive impacts and managing negative impacts are reviewed. This process builds on the Impact Identification process, and yields a conclusion on the company’s PI status and possibilities.

Impact Performance                                     

Impact performance actual delivery of positive impacts and management of negative impacts. It can be quantitatively and/or qualitatively measured per impact area through indicators and metrics. It is judged relative to specific targets and benchmarks (e.g. as set by policy goals and targets or in industry standards).

The company or bank’s impact performance, among other things, is considered during Impact Assessment using PII’s Impact Analysis Tools in order to establish its PI status and possibilities.

Impact management                                    

Impact management covers all actions taken to drive positive impact and reduce negative impacts: identifying significant impact areas, reviewing performance, setting appropriate targets, taking action to reach those targets, monitoring their attainment, constantly improving processes and outcomes/performance, communicating both on process and performance. Effective impact management is a function of the quality of the governance, resources and processes established by the company to reduce its negative impacts and increase its positive impacts. Impact management capabilities of the company are reviewed as a part of Impact Assessment.