Putting ‘impact’ first to finance sustainability

Imagine a smart lamppost that provides not just light but also wireless data services, solar panels and energy recharging. Lampposts like these could generate revenues, making street lighting more affordable for cities from Mumbai to Casablanca, helping inhabitants to make their way home more safely and speedily.

In fact, it is the residents of Huntington Beach in California who will soon benefit from similar lampposts. But they show how new business models, often linked to new technologies, have huge potential to deliver social outcomes, especially in emerging markets such as Africa where they are needed the most.

Making impact – or social and environmental outcomes – the key objective of business and financing models is the answer to achieving the UN’s 17 Sustainable Development Goals (SDGs). By 2030, the SDGs aim to lift people’s living standards to a desirable minimum level, within the environmental constraints of the planet. Yet with the clock ticking it is becoming apparent that existing finance is unlikely to be enough.

Africa’s funding gap

Forecasts show the huge size of the finance gap – and that Africa especially is the place where new solutions must be applied. The global cost of meeting the SDGs is estimated to be USD 5–7 trn a year, with a funding gap of USD 2.5 trn per year, according to the UNEP Finance Initiative (FI). Africa accounts for USD1.3 trn of that gap, over half, judging by estimates in ‘Rethinking impact to finance the SDGs’, a position paper published in November 2018 by UNEP FI.

“Europe is 90% towards the target but Africa is only 15%,” says Denis Childs, Head of Positive Impact Finance, Societe Generale, and a contributor to the paper. “When you are at 90% of the target it is a matter of adjustment. When you are at 15% it is a matter of looking at the subject differently.”

Making the desired impact or outcome the starting point for any business model, or investment, can help to achieve the SDGs’ stated aims and save money. For example, if a government or local authority wants to reduce energy consumption, under today’s models it might pay a company to fit LED lights. But surely a better way to do so would be for the company to pay for access to the lamp posts on the condition that it drives down energy consumption by, say, 70%, and to make its financial return from selling ancillary services such as wireless data?

The financial sector’s role

Such models could be integrated into a new type of public-private partnerships. The financial sector is in a strong position to encourage the development of impact-based models. To do so, it needs a framework for defining and monitoring so-called ‘Positive Impact Finance’. Accordingly, the UNEP FI has devised the Principles for Positive Impact Finance.

In brief, the four principles are:

1. Definition: Positive Impact Finance delivers a positive contribution to one or more of the three pillars of sustainable development (economic, environmental and social), once any potential negative elements have been identified and mitigated.
2. Frameworks: Financial and non-financial entities need adequate processes, methodologies and tools to identify and monitor positive impact.
3. Transparency: Financial and non-financial entities should provide transparency and disclosure on activities, processes and impact.
4. Assessment: The assessment of Positive Impact Finance should be based on the impacts achieved.

Disruption needed

While these remain early days for Positive Impact Finance, examples are beginning to emerge. Hermes and other real estate investors have created a framework for real estate developers looking to achieve a positive impact. Similarly, Societe Generale contributed to the Positive Impact Model Frameworks which enhance impact management at financial institutions. Societe Generale is also developing initiatives related to smart street lights in Africa.

New digital technology and the business models that go with it are especially well suited to such impact-related innovation. Rethinking the way sectors such as autos, healthcare and education operate will bring a perfect opportunity for impact-based models and related financing models to make a difference.

“What we need is disruption,” asserts Mr Childs. “The Googles and Facebooks are moving into Africa. Maybe Africa will develop new models and jump into the 21st Century. Through disruption, Africa can raise living standards within the planet’s environmental constraints.”