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Our Market Views
09/11/2017

What is Positive Impact Finance: the game-changer fostering more sustainable development?

Former UN Secretary-General Ban Ki-moon displayed genuine emotion during his 2011 speech to the General Assembly.

He listed the challenges facing the planet, warning of the rising pressures on land, energy, and food. He spoke of villagers in Kiribati who told him of their fears of climate change causing the sea to sweep into the ocean. A terrified young girl asked him what would become of her.

Then he turned to the audience and said, "Today, I pose her question to all of you ... distinguished heads of state and government and leaders of the world: What can we do? How can we help our people find greater peace, prosperity and justice in a world of crises?"

 
What indeed? In 2015 Ban Ki-moon published a big part of the answer. The UN's Sustainable Development Goals set out exactly what must be achieved by 2030 to stave off disaster. An estimated $5 trillion to $7 trillion a year is required simply to hit goals in clean energy, water, sanitation and agriculture. To put that number into context, the total value of venture capital spend is around $200 billion annually.

A month later a second document appeared. The UN's Positive Impact Manifesto revealed how those trillions are to be obtained. It set out how investors and financiers can increase their positive impact on society. It established the rules for a common language of progressive investing for humanity.

It was a critical document for ethical investing. For years the finance industry has spoken of a code of responsible behaviour. The result is a long list of initiatives. There is blended finance, green bonds, triple bottom line reporting, sustainable banking and so on. The new Positive Finance initiative is an umbrella concept covering each and every one of these.
 

"Don't be confused," warns Denis Childs, who pioneered the core concepts of Positive Impact Finance (PIF) at Societe Generale some 15 years ago. "Positive Impact Finance is different to Impact investing, which started years ago with JP Morgan and Rockefeller. Impact investing is for non-profit investors, and is focussed on equity rather than debt. It's a less extensive idea. Positive Impact Finance is broader, and for enterprises and investors with profitability constraints." In fact, it aims to nudge for-profit investing towards doing good. The "impact" for good must be clear and measurable. But so are returns.

"If you want to achieve the trillions needed to reach the UN goals, then you have to get everyone involved," says Childs. "It has to be a mainstream idea so it needs to offer as much profit as other types of business." Positive Impact Finance includes loans, bonds, equity, mezzanine finance, and notes of all types. The requirement is that it affects at least one of the three pillars of ethical action: environmental, social, and governance factors.

Positive Impact Finance is also rigorous in its criteria. Not all social schemes can claim this. Negative impacts must be identified and mitigated. For example, a wind farm can generate clean electricity, reducing carbon emissions. But the construction of the turbines may involve removing sections of forest for road. The turbines may threaten birds. There will be noise pollution. People may be displaced. These must be accounted for, then action taken, such as installing reflectors to deter birds, and compensating for damage to biodiversity.

Transparency is at the heart of Positive Impact Finance. There must be both a thorough methodology to investigate each project, and a clear communication of the results to all stakeholders. It must be noted that there is no single mandatory methodology or key performance indicator. Institutions will need to adopt whatever is best suited to their own activities.

Organizations must be frank and honest in all their reporting. Assessment should be based, in the words of the UN principles document, "on the actual impacts achieved." The exaggeration of accomplishment is alas all too common, nicknamed greenwashing. The ethos of Positive Impact Finance demands warts-and-all accounting.

The performance of ESG (environmental, social, and governance) stocks prove that ethical action is compatible with outstanding results. From 2007 to 2016 the MSCI ESG index outperformed the MSCI emerging markets index by around 50 percent. In July, Japan's national pension fund with $1.3 trillion under management announced it would begin tracking three ESG indexes for a small slice of its portfolio. Inspired by the spirit of Positive Impact Finance, Societe Generale has developed a full range of solutions. From corporates to investors, the bank supports clients across the full spectrum of sustainable finance. These include creating Positive Impact Structures Notes for investors to participate the movement, the launch of green and Positive Impact bonds, and the promotion of electric vehicles through its subsidiary ALD Automotive.
 
"The truth is that Positive Impact Finance is still not well known," says Childs. "There is a lot of work to do. We are going on the road to promote it. We went to Morocco and had success. Next we are going to South Africa and the Netherlands."

The aim is to establish a new framework for business, redirecting trillions of dollars to projects which can solve earth's biggest crises. It is a bold goal. But as Ban Ki-moon says, we have no choice. He put it this way: "Saving our planet, lifting people out of poverty, advancing economic growth ... These are one and the same fight. We must connect the dots between climate change, water scarcity, energy shortages, global health, food security and women's empowerment. Solutions to one problem must be solutions for all."

Positive Impact Finance offers us the tools to make the world a better place. What the scheme needs now is publicity, support, and energetic adoption to make it a reality.