Welcome to the Sustainable Finance section of Impact Garden.

A remarkable global movement has begun to recognise that value comes in more dimensions than just monetary. This section will explore the development of a lens for societal and environmental risk and return in our financial systems - as well as financing the UN SDGs.

The European Commission explains Sustainable Finance in this short video:

As a starting point, PRI (Principles for Responsible Investment) has provided an overview of WHY and HOW we need to adjust the current financial system, which does not operate sustainably and often fails society.

Below we go through some of the history of sustainable finance and run through some basic definitions to give you bearings. Please follow the links to the useful websites that will allow you to dive deeper into each element.

You will note that there is some ambiguity in the language and terminology that can be based on geography or industry. An article by TIIME summarising some of the challenges in the language used in this space is useful reading. We will explore further debates and trends in the "Inspiration" section below.

The roots of socially responsible investing go back hundreds of years.

"In the 1700s, members of the Religious Society of Friends – better known as Quakers – refused to take part in the slave trade or to invest in weapons of war. Around 1750, John Wesley, an early leader of the Methodist church, wrote a famous sermon, “The Use of Money”, in which he declared that it was a sin to make money at the expense of your own or your neighbour’s welfare. He specifically urged his congregants not to be involved in gambling, usury (loaning out money at unreasonably high interest rates), and industries that used toxic chemicals such as arsenic and lead.

For centuries, many socially responsible investors focused on avoiding "sin industries" such as gambling, tobacco, and liquor. However, that began to change in the 1960s, when investors became interested in using their money to promote civil rights, equality for women, and better treatment of workers. SRI achieved one of its most notable successes in the 1980s, when both individual investors and institutions began pulling their money out of South Africa because of its policy of apartheid, or strict separation between races. Their efforts played a major part in bringing an end to apartheid in 1994.” - Source: Money Crashers

You may also want to review "Bringing the Last Decade of Impact Investing to Life: An Interactive Timeline" by the Case Foundation.

Below are a few of the key terms used in Sustainable Finance, with links to in-depth sources and additional terminology. We being with an image we have used in our training on introducing sustainable finance to set the broad picture of capital investing through philanthropy - we will explore some of these categories below.

Sustainable (or Social) (and/or Responsible) Finance is an umbrella term for a range of investment approaches that go beyond looking at financial risk and return.

A sustainable financial centre “should ensure and improve economic efficiency, prosperity, and economic competitiveness both today and in the long-term, while contributing to protecting and restoring ecological systems, and enhancing cultural diversity and social well-being." (Source: Swiss Sustainable Finance)

Here are a few categories that fall under the heading of sustainable finance with links to definitions:

• green bonds (also explained in more detail below)
• impact investing (also explained in more detail below)
• microfinance
• active ownership

"SRI Basics" from the USSIF explains that responsible investors have traditionally focused on one or both of two strategies.

1. ESG incorporation - the consideration of environmental, community, other societal and corporate governance criteria in investment analysis and portfolio construction across a range of asset classes.
   
   • An important segment, community investing, seeks explicitly to finance projects or institutions that will serve poor and underserved communities.


2. The second strategy, for those with shares in publicly traded companies, is filing shareholder resolutions and practising other forms of shareholder engagement. Sustainable investing strategies work together to encourage responsible business practices and allocate capital for social and environmental benefit across the economy.

ESG refers to the Environmental, Social, and Governance practices of an investment.

"The integration of ESG factors is used to enhance traditional financial analysis by identifying potential risks and opportunities beyond technical valuations. While there is an overlay of social consciousness, the main objective of ESG valuation remains financial performance" (Source: Investopedia)

Impact investing goes well beyond avoiding harm and managing ESG risks. It aims to harness the power of investing to do good for society by choosing and managing investments to generate positive impact. (Source: IFC)

Impact investing can be defined as "investments made into companies, organisations, vehicles and funds with the intent to contribute to measurable positive social, economic and environmental impact alongside financial returns."

The GIIN (Global Impact Investing Network) has a broad and deep explanation of impact investing that we recommend for a deeper dive.

And if you want to see the space from yet another perspective, we recommend that you visit the private investor community for impact investors, called none other than ... TONIIC!

Our friends at PYMYMIC have a little video to introduce impact investing.

Have a look at this article unpuzzling ESG from Impact Investing.

Venture philanthropy (which includes social investing that is "impact-first") is about "matching the soul of philanthropy with the spirit of investment", resulting in a high-engagement and long-term approach to creating social impact.

You can find the core and guidelines of venture philanthropy on the EVPA Knowledge Center

EVPA has launched a thought-starter on differentiation of the "impact first" vs "finance first" in revised terms of "Investing for Impact" vs "Investing with Impact", as explained here:

Green bonds are debt instruments issued to fund projects that have a positive environmental or climate impact. Proceeds from these bonds are typically earmarked for green projects and are backed by the issuer’s entire balance sheet. Learn more in this video from the European Investment Bank.

And if you would like to know how the EU defines Green Finance vs Sustainable Finance vs ESG, this graph maps it out for you:

In essence, catalytic capital is investment capital (debt, equity, guarantees, etc) with which the investor accepts reduced financial expectations in order to bring about a greater social or environmental impact.  Lowered financial expectations refers to not only higher risk or lower return profile, but also a longer liquidity window or subordinate position in the investment structure than a more conventional investment. Other terms for this type of capital include concessionary capital, patient capital, and flexible capital, among others.

Catalytic capital fits in the middle of the spectrum of capital, which demonstrates a gradation of investor return expectations, from 100% loss (a grant) through to commercial returns at rates set in accordance with conventional financial benchmarks, which do not price in “externalities” (conventional equity investments). It can work to fill critical gaps for social entrepreneurs, particularly in early stages of development. It can also encourage third-party investment that may have not been otherwise possible (e.g. a development finance institution taking a subordinated position to entice private investors).  (SOURCE: Catalytic Capital Consortium)

Money Crashers has an article with a short overview of the history of SRI along with drivers, approaches and some first steps you can take to embed impact in your investment strategy (we will continue more with that in the next section).

The Swiss Sustainable Finance team have developed a glossary of detailed terms used in the SRI space that may come in handy.

Faith Driven Investor has an overview of some important players in the field, from faith-based investment targets to advisers.

An excellent piece of research by the University of Zurich has mapped out the range of sustainable investing approaches of private banks, with a small extract shown below:

For this visual overview of the Sustainable Finance space, please see the OECD report for more details.

We have created links to useful sites explaining terms used above, and will continue to add to this section with your feedback.

In this section we have compiled some videos and articles that have inspired debate and discussion in our team, bucketed in a few notable categories:

Governments are asking the private sector to join forces to address climate change and societal challenges.

From the World Investment Forum: Using Blended Capital to finance the SDGs.

Read this article from Medium on the different forms of capital that can create maximum impact: Blended Capital - the Future of Impact Investing.

"The SDGs are a powerful, visible and colourful set of flags around which investors can gather to learn a common language. Improved communication, complemented by bigger data on the consequences of choices made in the past, will lead to a better understanding and better investment decisions for the future. The SDGs are also 17 globally recognised beacons which investors can move towards. The speed and the direction of progress, how to measure it, and how to manage it is now a question of "how and when" and not a question of "if  or why". Investors now have a framework within which to channel their sense of urgency for change towards more sustainable development."

Vivina Berla, Co-Managing Partner, Sarona Asset Management

The SDG Investment Case and a Case study series highlights the following:

"The launch of the UN Sustainable Development Goals (SDGs) in 2015 has made clear that the global community of countries relies heavily on the private sector to solve some of the most urgent problems the world is facing. Both companies and institutional investors are being asked to contribute to the SDGs through their business activities, asset allocation and investment decisions. 

Since the launch of the Principles for Responsible Investment in 2006, the preamble to the Principles has said: "We recognise that applying these Principles may better align investors with broader objectives of society." Never before have these "broader objectives of society" been more clearly defined than in the SDGs. All the countries of the world have agreed on a sustainability agenda, covering three broad areas - economic,  social and environmental development – and comprising 17 global goals, further developed in 169 targets, to be reached by 2030…

But to do so, investors will want to know how contributing to the SDGs will help them fulfil liabilities and beneficiaries’/clients’ expectations about risk-adjusted returns. They will ask: why should I consider the SDGs relevant to my investment strategy, policy, asset allocation, investment decisions and active ownership?"

1. The SDGs are the globally agreed sustainability framework
2. Macro risks: The SDGs are an unavoidable consideration for  “universal owners”
3. Macro opportunities: The SDGs will drive global economic growth
4. Micro risks: The SDGs as a risk framework
5. Micro opportunities: The SDGs as a capital allocation guide

The UN estimates the gap in financing to achieve the Sustainable Development Goals (SDGs) at $2.5 trillion per year in developing countries alone (UNCTAD, 2014). You can also read the World Investment Forum's guide with four key steps to boost financing for the SDGs.

The SDGs and their targets provide a way to understand and measure investors’ real-world impact, and a way for responsible investors to demonstrate how their efforts to incorporate issues such as climate change, working conditions and board diversity into their investment approach are contributing to the kind of world their beneficiaries want to live in.

In line with the Paris agreement, each country designs their own climate action strategies and commitments, which are set out in so-called nationally determined contributions (NDCs). Countries are expected to submit new NDCs every five years, making them successively more ambitious. In addition, countries were called to submit updates to their first submission before the second submissions, which are expected in 2025. The NDC-SDG Connections tool analyses and compares how climate actions formulated in NDCs correspond to each of the 17 SDGs.

UNDP SDG Impact Practice Standards for Private Equity
The SDG Impact Practice Standards for Private Equity Funds (the Standards) are part of the United Nations Development Programme (UNDP) SDG Impact and specifically embed the notion of investment to enable achievement of the SDGs. Their goal is to catalyse much-needed private capital and direct it towards the achievement of the SDGs and help connect impact-driven activity with investment to significantly enhance progress toward development goals.

• Download the Practice Standards for Private Equity
• Download the Certification Framework
• Download the Mapping to Principles

This section provides an overview of some investment themes and lenses in the impact investing space.

Below are some interesting links on women and impact investing from Gender Lens Investing or Gender Smart Investing, leading the development of this field:

• 2X global (resulting from the merger of 2X and Gender Smart Investing)

• Criterion Institute

• Changing the Status Quo: How Women are Leading the Charge on Impact Investing - One of the biggest drivers of the growing interest in impact investing and ESG data is the fact that women are gaining access to significant capital and want to invest that capital into financial opportunities that align with their values.

Additional resources are also helpful when it comes to JEDI investing (as in Justice Equity Diversity and Inclusion investing) - the Gender-Smart team developed a JEDI toolkit, have a look HERE.

• Inclusive finance also known as financial inclusion is an integral part of sustainable development. According to the concept of inclusive finance all people and businesses should have access to affordable and useful products and services that meet their needs. In this regard, the universal access to financial services such as credit, insurance and savings opportunities will help every individual advance their living standards, especially the bottom of the pyramid. More information regarding inclusive finance can be accessed through the below links:
  
  https://www.centerforfinancialinclusion.org/
  
  https://www.cgap.org/financial-inclusion

• As a philosophy and approach to land management, regenerative agriculture asks us to think about how all aspects of agriculture are connected through a web—a network of entities who grow, enhance, exchange, distribute, and consume goods and services—instead of a linear supply chain. It’s about farming and ranching in a style that nourishes people and the earth, with specific practices varying from grower to grower and from region to region. There’s no strict rule book, but the holistic principles behind the dynamic system of regenerative agriculture are meant to restore soil and ecosystem health, address inequity, and leave our land, waters, and climate in better shape for future generations (source: HERE).
  
  More information can be found through the below links.
  
  What is regenerative agriculture.
  
  Five principles of regenerative agriculture.
  
  Why regenerative agriculture.

• Climate tech is defined as technologies that are explicitly focused on reducing Green House Gas emissions, or addressing the impacts of global warming. You can find more details HERE.

• (Image credit – Dan Stark on Unsplash)
  
  According to the World Bank, the blue economy is the "sustainable use of ocean resources for economic growth, improved livelihoods, and jobs while preserving the health of ocean ecosystem." European Commission defines it as "All economic activities related to oceans, seas and coasts." 

• Biodiversity refers to forests, oceans, and other ecosystems, as well as efforts to protect them. It’s vital because processes such as the nitrogen and carbon cycle are impossible without a variety of organisms existing and being involved at every stage, while ecosystem services such as pollination and flood prevention are inextricably linked with life on our planet.
  
  Investing in biodiversity involves mobilising sustainable finance for the conservation and restoration of natural habitats, as well as promoting sustainable practices.

• EU Regulation is an important driver for the growth of sustainable finance and impact investing. Please find HERE an article that will give you all the insights you need about this regulatory alphabet soup: SFDR, CSRD and the EU Taxonomy. More about the EU Taxonomy on the European Commision website.

(Image credit: Edward Howell on Unsplash)             

• Visit the GIIN website: What you need to know about impact investing?

• Read this e-guide to early stage global impact investing from TONIIC (available in English, Spanish and Portuguese).


• Our friends from TIIME, with the inspirational Ferd Social Entrepreneurship organisation in Norway, wrote an article on how to get started.


• Silicon Luxembourg have some advice for early-stage investors.

• A good look in the mirror on how we, as impact investors, contribute to or constrain the success of our investee companies.


• A compilation of apps that may be helpful


• If you are a financial adviser finding your way through this space and want to engage with your clients, we recommend you read this article for advisers.

There is no shortage and debate and discussion in the domain of Sustainable Finance, which is a challenge in its development but also helps us identify weaknesses and shortcomings that need to be addressed to drive requisite change.

• ESG Investing: Too Good to Be True by Nicolas Rabener


• If ‘ESG investing’ is so great, why is the world going to hell? (podcast)
  There’s a huge disconnect between sustainable investing, investing with purpose, or whatever you want to call it, and these social and economic realities we see around us," Rose-Smith says.
  A flurry of recent articles have tried to puncture the ESG balloon. An example of the genre is Bloomberg’s "How Socially Responsible Investing Lost Its Soul", which suggests the marketing hype around ESG obscures a more prosaic motivation for fund managers: higher fees.
  Writes Rachel Evans, "Criteria are so broad and disparate that companies as unlikely as Exxon Mobil Corp. and Philip Morris International Inc., the maker of Marlboro cigarettes, make the cut in some cases." (Vox weighed in with "Socially responsible investment is a $12 trillion industry. Does it make the world better? Probably not.")


• Reality checks on the challenges of impact investing abound. Here are some insights from Harvey Koh's article on impact investing in India: "It took two decades and an estimated $20bn in grants and concessional investment, before microfinance broke into mainstream investing."


• Almost Everything You Know About Impact Investing Is Wrong by Wendy Abt, Dec. 18, 2018: Growing confusion about impact investing's key principles and practices has it headed for a fall.


• The death of private banking ... and how wealth management can have a brighter future, by Helen Avery, Feb. 6, 2018.


• New Report: Equality Impact Investing – from principles to practice by Dartington, Jun. 5, 2019.


• Yes, peace, justice and strong civic institutions are investable opportunities by Jessica Pothering, Jul. 14, 2017.

• Here are two recommendations from the article 10 Great Books for Sustainable Investors
  
  • Sustainable Investing: The Art of Long Term Performance
    Edited by Cary Krosinsky and Nick Robins, this book in 2008 drew a line under the transition that was then starting from the more negative, often financially under performing SRI approaches to what has become the fastest growing segment of SRI, that being more positive forms of sustainable investment strategy which have been outperforming.
  
  
  • Evolutions in Sustainable Investing: Strategies, Funds and Thought Leadership
    Edited by Cary Krosinsky with Nick Robins and Stephen Viederman, this follow-up book demonstrated 15 case studies of investor strategy, in combination with regional perspectives and thought leadership from the likes of Paul Hawken and many other respected figures in the field of sustainable investing.


• Five older books to keep in mind
  
  • Socially Responsible Investing: Making a Difference and Making Money by Amy Domini: One of the pioneer’s in SRI writes about making money while building a better society. Domini describes her ways of screening companies, how to use shareholder power to communicate with companies and making a difference through community investment.
  • The Complete Idiot's Guide to Socially Responsible Investing by Ken Little: Little, a veteran financial writer and editor, presents an approachable and easy to understand introduction to socially responsible investing.
  • Beyond The Bottom Line: Putting Social Responsibility to Work for Your Business and the World by Joel Makower: An argument that firms "function best when they merge their business interests with the interests of customers, employees, suppliers." The author looks at well-known companies such as The Body Shop and Reebok and explains how they have implemented socially and environmentally responsible policies into their operations.
  • The SRI Advantage by Peter Camejo: Camejo, an experienced investment adviser specializing in socially responsible investing, argues that SR investors need not sacrifice performance for their beliefs. He presents evidence that SRI has outperformed financially, explains why outperforms, and then examines what it all means for investment professionals, investors, pension funds, and community/non-profit groups.
  • The Triple Bottom Line by Andrew W. Savitz: Savitz, a sustainable business consultant, lays out the rise of sustainability within the business world and shows how and why financial success increasingly goes hand in hand with social and environmental achievement.


• 5 excellent books on impact investing


• Regenerative Capitalism - How Universal Principles And Patterns Will Shape Our New Economy: John Fullerton’s struggle to find a credible alternative framework for economics and finance inspired this holistic view of how the economy can be redesigned to account for value on multiple dimensions. An excellent read. Don’t hesitate to look up his video links if you prefer that form of knowledge transfer - he is as eloquent in person as he is in his writing).

Here are a few knowledge centres we recommend for academic studies and reports:

• The Global Research Alliance for Sustainable Finance and Investment
• Journal of Sustainable Finance & Investment
• University of Zurich Center for Sustainable Finance and Private Wealth, Department of Banking and Finance
• Swiss Sustainable Finance Library
• PYMWYMIC Knowledge Centre

A few important studies to add to the deep dive:

• Sustainable Finance - progress report from the UN for a comprehensive overview of the progress made by the G20 country members including innovations by international organisations and examples of international cooperation
• Sizing the Impact Investing Market report from The Global Impact Investing Network provides an in-depth analysis of the current size and composition of the impact investing market.

There are excellent sources of information all over the web. We have covered in this section (and in key players) the GIIN, TONIIC, PRI and other powerful resources on sustainable investing. There are plenty of knowledge repositories with further information.

The Impact Investing Think Tank is another source of details and information that includes snapshots of portfolios.

Impact Measurement and Management is a fundamental issue for sustainable and impact investing - this is covered in the section "Impact Measurement”.

In the impact investing space, one of the generally accepted systems for measuring, managing, and optimising impact is IRIS+. It partners key players such as GIIN and the Impact Management Project which now has migrated to Impact Frontier - more than 2,000 enterprises, investors and practitioners who have come together to build global consensus on how we talk about, measure and manage impact.

We look forward to building out this section with your input and feedback!