Finance sector seeks to plug impact investing gap with new ‘taskforce’

At a lunch in Johannesburg last week, the conversation turned — as it often does among business folk everywhere these days — to whether the term “ESG” is fit for purpose.

One person at the table decried the unnecessary complexity and confusion resulting from the awkward jamming together of environmental, social and governance issues. Far better, she argued, to have a clear focus on the concept of sustainable development, with its 17 key components identified by the UN in 2015.

Some in the corridors of high finance, it seems, have been thinking along similar lines. A new private-sector initiative, reported for the first time in today’s newsletter, is aiming at boosting financial support for the UN Sustainable Development Goals through data disclosure.

As I write below, this is a welcome move, but one that may be viewed warily in some quarters. Let us know what you make of it — write to us at moralmoneyreply@ft.com, or just reply to this email.

SUSTAINABLE DEVELOPMENT

Bankers turn their sights on the SDGs

When nearly 200 countries agreed in 2015 on the UN Sustainable Development Goals — a set of 17 targets, from ending hunger to universal education, to be reached by 2030 — it was a powerful signal of shared intent.

Today, more than halfway through the initiative’s timeframe, most of the metrics are lamentably off track.

Progress has been hit hard by the fallout from the Covid-19 pandemic and Russia’s war in Ukraine. But those calamities have exacerbated a much larger structural problem of capital flows, with developing-country governments and companies struggling to raise the investment required to drive sustainable growth. The United Nations Conference on Trade and Development estimated in July that developing nations would need an additional $4tn of investment per year to hit the SDGs.

A new financial sector initiative, led by US bank JPMorgan and France’s Natixis CIB, aims to make an impact on this yawning shortfall by helping corporate and sovereign entities — especially in developing economies — report on their contribution towards the SDGs. The hope is that the improved data supply will help them attract more impact-oriented capital from international investors.

Given the dire need for new investment on this front, this is an encouraging development — albeit one that will be greeted by many with understandable scepticism.

The Impact Disclosure Taskforce is set to launch publicly later this week, after seven months of private discussions between its members, which include banks like Deutsche Bank and Citi, asset managers such as Amundi and Pictet, and ESG research businesses including Morningstar Sustainalytics.

It is hardly the first project set up to promote data sharing around SDG-related investment. The Global Reporting Initiative, whose disclosure framework is used by more than 10,000 companies and organisations around the world, offers a set of tools specifically for this purpose. SDG Impact, a dedicated UN body, offers a set of standards that investors and businesses can use to “embed” the SDGs into their operations. Meanwhile, the wider sustainability data industry has been mushrooming.

But the IDT is filling an important gap, argued Cédric Merle of Natixis, who co-chairs the initiative. ESG data frameworks have often focused too tightly on climate rather than social considerations, and have often been “backward-looking”, he told me. “These are the shortcomings that we’ll try to solve [through] entity-level disclosures and targeting,” Merle said.

The IDT is working on a plan — to go out for public consultation next April — around creating a three-part “ecosystem”.

This will include guidance for companies and sovereign entities to detail how they are supporting the SDGs through their operations or investments. Another element will be recommendations for service providers that could support the project, such as data and analytics firms. The IDT also wants to create a “data platform” of its own, to help disseminate relevant information.

“It’s about measurability and specificity,” Arsalan Mahtafar of JPMorgan, the other IDT co-chair, told me. “And it’s about targeting needs, ensuring that the impact is being made where it’s needed most.”

Some people working in developing nations, however, are likely to bridle at the notion that their difficulty in raising foreign capital is primarily down to their own failure to provide high-quality data — rather than investors’ unwillingness to commit funds to their geographies.

As South African public enterprises minister Pravin Gordhan put it at last week’s Moral Money Summit Africa in Johannesburg, many investors still view Africa in particular as “a frightening place”. And as leading asset managers like BlackRock’s Larry Fink, under pressure from conservative politicians, reaffirm their primary commitment to investor returns, it’s fair to ask whether sustainable development is really high on their agenda.

“The private sector and institutional investors do want to be part of the solution,” insisted Erich Cripton, director of business relations at CDPQ, the $400bn Canadian investment group that is another founding member of the IDT. More and better data, he argued, would help the private sector “achieve both the financial returns and the societal impacts that they hope to achieve”.

Like other corporate-heavy “task forces” — such as the TCFD and TNFD, focused respectively on climate-related and nature-related financial disclosures — the IDT is likely to face questions over its composition. All its members are from big financial entities in the developed world; there are no companies from developing nations, nor members from civil society or academia (the IDT says it “obtains input” from development banks and bodies like the Global Impact Investing Network).

On balance, however, this initiative still looks like a positive thing. As we’ve written before, there are serious concerns that the ESG agenda tilts far too heavily towards avoiding risk rather than driving impact — thereby restricting investment in developing countries. By taking part in this project, some of the world’s biggest financial institutions are at least signalling an awareness of that problem.

The fact the task force consists of representatives of big financial institutions means that its recommendations — like those of the TNFD, published earlier this year — should not be viewed as the basis for rules and standards around impact reporting. But that is not the intention, its co-chairs say.

Rather, the IDT can set out a position on what type of data its members are seeking in order to make sustainable development-linked investments. The IDT members have the power to drive serious flows of capital in this area; JPMorgan alone has pledged to finance or facilitate $2.5tn of investment towards climate action or sustainable development between 2021 and 2030.

For developing-nation companies and governments seeking a slice of this capital, a clear picture of what big international investors and financiers are looking for can be no bad thing.

But the financial companies behind the IDT can expect serious credit for their work on this initiative only when serious money starts to flow on the back of it. In that respect, the project itself may have created some useful pressure on these financial giants to put their money where their mouth is. As Merle noted, if their initiative does help improve the supply of data, they will need to show how they are using that data to drive large amounts of capital where it is most needed.

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