Call for impact transparency part of blueprint to mobilise institutional capital “for a just and inclusive transition to net zero”.
The Group of Seven (G7) nations must mandate impact accounting to support the increased flow of private capital needed to achieve the UN Sustainable Development Goals (SDGs) and the objectives of the Paris Agreement, according to a new report by the Impact Taskforce (ITF).
To increase the volume and effectiveness of private capital directed at making a positive economic and social impact, policymakers must lead multilateral efforts to improve the transparency, consistency and integrity of disclosures around investment outcomes, said the report.
Investors and companies should utilise and enhance voluntary impact measurement standards while a new mandatory impact accounting framework is put in place, it said.
Formed under the UK presidency of the G7 earlier this year, the ITF is an independent, industry-led body representing more than 100 business, investment and public policy institutions from 40 countries. The report called for the G7 to “take urgent action to mobilise more institutional capital for a just and inclusive transition to net zero”.
Alongside its recommendations on impact-related disclosures and data, the ITF also made proposals aimed at stimulating the development of policies and investment vehicles which would channel more capital toward projects with positive social and environmental impacts, notably those contributing to SDGs.
These included measures to increase the supply of investment vehicles suitable for institutional investors, improve the ability of multilateral development banks and development finance institutions to catalyse private finance and promote the use of three just transition principles to better integrate social and environmental objectives.
The UN-convened Net-Zero Asset Owner Alliance recently issued recommendations on the greater use of blended finance to channel private capital toward climate mitigation and adaption projects in less developed countries, in lieu of the US$100 billion per annum promised by rich countries.
2030: A “critical year of accountability”
Speaking at a launch event, ITF Chair Nick Hurd said the “yawning and dangerous gap between rhetoric and delivery” on net zero greenhouse gas (GHG) emissions and SDGs must be closed over the eight years to 2030, which he described as a “critical year of accountability”.
“The challenge is to structure, with much greater urgency, a new model of public-private collaboration that makes it easier and more compelling for investor groups to allocate capital for risk-adjusted return and positive impact without perceived trade-offs,” he added.
The taskforce’s recommendations aim to ensure future economic systems “account properly for impact on people and planet”, said Hurd, meaning investment decisions could be made through the “triple lens of risk, return and impact”.
According to the International Finance Corporation (IFC), the global market for impact investments grew to US$2.3 trillion last year, the equivalent of 2% of global AUM, but just a quarter of these investments had a clear impact management system in place.
The ITF report calls on governments to mandate harmonised reporting on social and environmental impacts, if necessary through the revision of national company laws, in order to encourage enhanced accounting and reporting practices by corporates. Prior to any changes to legislation, governments should endorse the development of frameworks for reporting on social impact, following the example of the Task Force on Climate-related Financial Disclosures, and also mandate that any impact statements disclose the limitations, thresholds and assumptions underpinning them, to increase their reliability and comparability.
The G7 should collaborate with the private sector, standard-setters and academia on standardising and improving approaches to impact valuation, the report added. “This work is needed to deepen our understanding of how to value impact in a way that allows a meaningful comparison of the impacts and profits of companies, while also revealing the relationship between the two,” it said, noting the growing need for regulators to assess different approaches to impact valuation at scale.
As mandatory reporting and accounting practices are adapted to incorporate measures of impact, investors, standards setters, corporates and others should work to improve voluntary disclosure practices, the report said. This includes making more use of science-based thresholds and reflecting the interdependencies between social and environmental impacts.
Last month, a new platform was launched to improve interoperability between existing impact measurement standards and support coordinated dialogue with policymakers, with the aim of consolidating best practice in impact management. Partners to the Impact Management Platform include the Global Impact Investing Network, Global Reporting Initiative, the UN-convened Principles for Responsible Investment and World Benchmarking Alliance.
Impact disclosures by investors
The ITF also recommends that investors be subject to more detailed disclosures, to reflect their social and environmental impacts, separate from the corporates to which they provide finance. Prior to the introduction of mandatory impact disclosure rules, investors should use external assurance practices, building on standards such as the Operating Principles for Impact Measurement, to track impact progress and build trust with stakeholders, thus reducing the risk of greenwashing.
The report welcomed the establishment of the International Sustainability Standards Board (ISSB) by the IFRS Foundation, as it would establish a global ‘baseline’ for the reporting of social and environmental issues that impact enterprise value. But it called for an “urgent build” to cover impacts not covered by the ISSB, through measures including voluntary and mandatory disclosure, changes to company law and the scope of directors’ duties and evolution of accounting and assurance standards.
It also urged governments to participate in upcoming ISSB consultations to ensure the new body balances social and environmental issues and reflects the needs of underserved constituencies, specifically emerging economies and small and medium-sized enterprises.
“Transparent and comparable standards will be an essential tool for market participants to evaluate and optimise their impact,” said Douglas Peterson, President and CEO, S&P Global, and Chair of the ITF workstream focused on impact reporting.
“These recommendations provide a valuable roadmap for the investment community’s search for greater transparency, evidence-based insights and high-quality data and analytics. Most importantly, they inform and advance the goal of achieving a sustainable and equitable future.”