The importance of metrics to social impact investing

Many people across the world breathed a sigh of relief when the president-elect Joe Biden confirmed the US will rejoin the Paris Climate Accord in 2021. It feels like the ?E? in ESG (Environmental, Social, and Corporate Governance) might just be back on target.  But what about the ?S??  

Whilst the 'S' in ESG was once perhaps the plainer sibling to the more immediately glamorous 'E', we are now seeing the market for social impact investments and sustainability-linked lending really come of age. Investors and lenders are increasingly attracted to businesses that can demonstrate they are tackling a whole host of social issues from poor housing, to education poverty, inequality and poor healthcare. And those organisations which seek to ensure their own supply chains behave responsibly, as a pre-condition to receiving their business, are particularly attractive propositions.

ESG, sustainability, impact investment and impact finance are now mainstream. However, as the appetite grows so have the challenges. The complaint used to be a shortage of opportunities, not cash. But those opportunities now exist - not least as the underlying environmental and social challenges increase every year. So what is slowing the financial services sector down? 

One major challenge is the impact KPI: who establishes it? How is it measured? How does it change over time, where the investment is more long-term? And is it suitably ambitious? It is no longer enough for a housing association to say they are providing social housing and therefore delivering on a social challenge. They can and should - and some do - go further. That might be helping unemployed tenants back to the workforce or ensuring their own contactors tackle diversity issues.  Moreover, as the world focuses on net-zero, it's clear that whatever the challenges are that investors and funders need to incentivise in 2030, 2040 and 2050 they will be different from those of today.

In March 2021 the EU will bring in the beginnings of a framework for ESG investment. The combination of the EU Disclosure Regulation, which covers whether products feature sustainability considerations, and the Taxonomy Regulation, which takes steps to define what 'sustainable? means, help add some parameters to the KPI challenge. It should help combat fears of ?greenwashing? whilst ensuring that ESG risks and factors will finally be accounted for. This is good news but it's not great news.

In essence the EU's thinking anchors ESG back to the E. And while this will hopefully evolve, it currently relegates the S to a secondary consideration.  As the UK exits the EU, how closely we align to the EU's thinking will be interesting - one hopes we?ll go further and tackle the S too. But creating and enforcing a whole set of environmental metrics from scratch was a mammoth task. How much more so for social impact?

This is a market poised on the brink of a real breakthrough. There is more interest - and money - than ever before. Putting purpose before profit demonstrates the financial services sector at its best, also  that this sector in the UK is at the forefront of innovation to help tackle the challenges. And no one doubts the very real problems that could be solved. 

The missing link is finding a way to set, challenge, measure and assess KPIs with confidence. The lack of this is slowing progress, and causing unease for those businesses and organisations  on the conservative (with a small ?c?) side of the fence  ? whether they?re the ones with the cash or the ones that need it.

To quote the great scientist Lord Kelvin; if you cannot measure it, you cannot improve it.

For more information visit the Addleshaw Goddard website.

Last week UK Finance published a white paper on establishing a principles-based framework for the measurement and reporting of multi-year commitments to Sustainable Finance. Read it here 


Sustainability training for members
Sustainability is a priority for UK Finance. As a part of this we understand the need for firms to appraise the training and development support that many of their employees across the business will need. As a contribution, UK Finance is pleased to partner with Finance Unlocked to offer their ESG Learning Pathway (50 per cent off), and with the Chartered Banker Institute in distributing their Certificate in Green and Sustainable Finance (30 per cent off)