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The ESG Interview: Intent on Impact

Nick Hurd, Chair of the Impact Taskforce, says public-private collaboration needs to improve to close the UN SDG delivery gap.

European financial regulators’ efforts to police environmental impact claims are ineffective and create a greater risk of greenwashing.

This is the excoriating view from the 2° Investing Initiative (2DII), an independent, non-profit think tank working to align financial markets and regulations with the Paris Agreement goals.

In a report ‘Fighting greenwashing… what do we really need?’, 2DII states: “While general finance sector regulation is applicable to environmental impact claims in the finance sector, these rules are too general and high level to provide effective governance of environmental impact claims.”

Even more concerningly, the think tank argues that “the sustainable finance rules do not provide further assistance since they are not adapted to regulate environmental impact claims”.

It adds: “Current sustainable finance rules do not accommodate the concept of investor impact and consequently are not aligned with the theories of attribution differentiating investee company impact and investor impact.”

And for good measure it claims that the Sustainable Finance Disclosure Regulation (SFDR) has simply introduced marketing labels which create additional confusion and greater risk of greenwashing, especially when combined with environmental impact claims”.

This reflects the nascent state of impact measurement and management. Not only is more consensus needed on concepts – including identifying investor impact separately from that of investee companies – but also on the development of disclosures and metrics that can ‘put a number’ on impact, enabling investors to compare impact of their investment decisions across diverse projects.

2DII’s  assessment is likely to be disappointing for policymakers at the European Commission who just last month claimed that “greenwashing is over” and that “Europe is at the forefront of the international race to standards, setting high standards in line with our environmental and social ambitions”.

But for Nick Hurd, Chair of the Impact Taskforce (ITF) – a global initiative established under the UK’s recent presidency of the Group of Seven to improve measurement of business and investment impact, and identify investment structures that drive capital towards projects that deliver positive impact – 2DII’s condemnation of current regulations and frameworks will come as no surprise.

Hurd says: “There is a there is a growing awareness that we haven’t got a chance of meeting the UN Sustainable Development Goals (SDGs) or delivering net zero promises without mobilising private capital on a serious scale. We’ve talked about mobilising trillions of dollars [for impact investment] for a very long time, but just haven’t done it. There is a growing realisation that the gap between rhetoric and delivery needs to close.”

A recent World Bank report claims between US$5-US$7 trillion a year SDG-aligned impact investing is needed if there is any hope of ensuring an equitable world for the next generation.

Support and engage

While recognising the delivery gap, in a six-month progress review published last month, Hurd says he is “particularly encouraged” by developments that directly take forward key recommendations made by the ITF.

This includes initial drafts and proposals by the International Sustainability Standards Board (ISSB), the US Securities and Exchange Commission (SEC) and the EU´s European Financial Reporting Advisory Group (EFRAG) to advance climate and sustainability reporting standards.

Hurd encourages stakeholders “to support and engage closely” with the ISSB’s consultation on climate and sustainability reporting standards which ends on 29 July.

“We urge governments, industry bodies, standard-setters and other relevant stakeholders to take into account the ITF recommendations to achieve standards that are truly globally relevant,” Hurd says, arguing that today’s efforts toward global enterprise-value led reporting standards are the building blocks for tomorrow’s impact-focused disclosures to investors.

These include balancing social and environmental issues; acknowledging and reflecting realities of both emerging and developed economies; actively engaging small and medium enterprises along the value chain; and putting forward an assurance regime for all data relevant to enterprise value for public companies.

In terms of support for ITF’s “mobilisation of capital towards and just and inclusive transition”, the taskforce has launched the Just Transition Finance Challenge, which is a “new coalition of investors heeding [ITF’s] call to launch more financing vehicles that deliver a global, fair and inclusive transition to net zero”.

Hurd says: “I was really encouraged by the quality of institutions and the people that came forward to be part of [ITF and the Just Transition Finance Challenge]. At the heart of this is trying to find new models of collaboration for those two worlds of public and private, to help them talk the same language and find ways of working together to allow this capital to flow to the projects that have the most positive social and environmental impact.”

Considerable disconnect

Hurd concedes there is still considerable disconnect and disparity in the various regulations, frameworks and guidance that are shaping sustainable finance, which can block efficient allocation of capital. Much of this comes down to mutual misunderstanding between would-be partners.

“In my experience, the private sector in the public sector rarely understand each other well, nor do they communicate or collaborate very effectively. That must change.”

He continues: “If we need to mobilise a lot more money into areas of high impact, especially into emerging economies and frontier markets, then the private side is entirely entitled to ask the public sector for a a serious conversation about how we how they structure those opportunities.”

Hurd’s position reflects that of 2DII which has identified the need to create a separate category for impact-oriented financial products “in the context of improving financial institution legal duties”.

Supporting this, Hurd wants to see a concerted effort by the industry to measure how impact investing contributes to the company’s bottom line, and in turn, to an asset owner’s portfolio.

“We have to be ambitious and go beyond the need to report on impacts that are material to enterprise value to impacts that are relevant to all stakeholders. We’ve signalled a journey towards a future in which we would have the methodologies whereby we could show monetary impact and create the ability to be able to compare in a meaningful way, the impact of different investments in different companies.”

Impact metrics

Among other initiatives, Hurd points to the recent collaboration of Value Balancing Alliance (VBA) – an alliance of multinational companies – and the Impact-Weighted Accounts Project at Harvard Business School (HBS) to share their combined efforts on impact accounting and formulate a single methodology.

The VBA HBS joint project would, they say, “build upon the shared principle that the work be made publicly available, is scientifically rigorous in its approach, seeks to value impacts for all stakeholders, is open for collaboration with other initiatives and offers standardised methodologies to inform international standards development and regulators”.

Hurd says creating these kinds of metrics is “technical and complex” but necessary. While efforts evolve, investors need not wait for regulators and policymakers; enough guidance and information already exists to allow impact investing to form a key part of their strategies.

The forthcoming COP27 in Africa and COP28 in the United Arab Emirates will, Hurd hopes, be galvanising forces in meeting ITF’s goal: to fully integrating impact investing into the mainstream.

He adds: “Current controversy and confusion amongst some market participants should be seen as both a sign of relevance of the impact transparency and integrity agenda, as well as a clear call to provide high quality data to all stakeholders, making our work and recommendations, as well as the goals of the ISSB and similar efforts, more important than ever.”

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