Commentary on BSI’s draft guide on sustainable finance principles
By Martha Walsh, Anna Murphy and Ilkka Saarinen
The British Standards Institute: for those of us over a certain age, BSI is synonymous with the kitemark symbols in the corner of car windows that you stared through as a child on long car journeys, before iPads were invented.
BSI is still setting standards, but things have moved on. Their Finance for the future programme is helping bring sustainable finance into the mainstream, by addressing the lack of transparency and consistency of approach to achieving the United Nation’s Sustainable Development Goals. BSI has set out to develop — in collaboration — a set of “robust, internationally-relevant sustainable finance standards”, building upon existing efforts and initiatives. Music to the ears of those of us in the impact world.
At Project Heather, it is our ambition that an impact-focused stock exchange will help drive convergence in impact measurement, in turn helping impact reporting into the mainstream. So we were delighted to contribute our collected views to the BSI’s draft Publicly Available Specification (PAS) — Framework for embedding sustainable finance principles in financial services organisations — Guide (due to be published before the end of this year).
We believe that financial markets hold the key to tackling the major challenges facing society, by placing a focus on whole system value: where social and environmental value is considered holistically, alongside financial return. Issuers to the proposed Scottish Stock Exchange will be required to set out their theory of change in their impact report in order to gain admission, and to report annually on their impact thereafter. The exchange’s listing rules will be accompanied by guidance for issuers. Project Heather does not set out to create new impact investing standards or reporting frameworks but rather to help build consensus on shared definitions.
A key risk to the success of sustainable finance is ‘greenwashing’ and it is vital that the participants in global financial markets converge on ever stricter standards for protecting the world around us and continue to hold each other to account.
There was much to like about BSI’s draft PAS. Here are some of our takeaways.
One
We agree with BSI’s decision to use the Global Impact Investing Network’s (GIIN) definition of impact investing as an “approach where investments are made with the intention to generate positive, measurable social and environmental impact alongside a financial return.” GIIN’s definition captures the approach perfectly while keeping it simple.
Two
We support bringing the term ‘natural capital’ into mainstream financial terminology, being the “stock of renewable and non-renewable resources (e.g. plants, animals, air, water, soils, minerals) that combine to yield a flow of benefits to people”. However, while the terminology of natural capital helps us understand that it is an asset capable of generating benefits for people, this may imply that natural capital can be replaced with other capital (eg. financial or manufactured): many natural resources such as clean air and fertile soil have no man-made substitutes. We are strongly in favour of raising the awareness of the term natural capital while stressing that its value should be accounted for in whole system value. We believe that only by doing so will financial returns be truly ‘real’.
Three
If calculating environmental impact is a relatively new science, quantifying “positive social outcomes” definitely still suffers from some artistic liberties. When defining social bonds as those whose use of proceeds raise funds for new and existing projects with positive social outcomes, it begs the question, what is positive social impact? We would use the Principles for Positive Impact Finance’s definition — ‘that which serves to deliver a positive contribution to one or more of the three pillars of sustainable development (economic, environmental and social), once any potential negative impacts to any of the pillars have been duly identified and mitigated.” (p.2)
Four
Sustainability is defined as the “state of the global system, including environmental, social and economic aspects, in which the needs of the present are met without compromising the ability of future generations to meet their own needs”. This definition should include whole system value and/or natural capital, which might be explored as a reframing of the kind of growth we seek through applying these sustainability principles.
Five
The organisation Future Fit outlines four types of growth as below. Project Heather ultimately seeks to support an economy whose end destination isn’t GDP (type 2), but rather type 3 and 4 — a growth in people’s capacity to lead fulfilling lives and increased natural capital.
Type 1: Growth in biophysical throughout. The amount of raw materials (and waste we put back into) the environment. Indefinite growth of this type isn’t possible in a world of finite resources.
Type 2: Growth in production and consumption. The amount of goods and services flowing through society — often understood as GDP.
Type 3: Growth in economic welfare. The growth in people’s capacity to lead a fulfilling life — in particular to meet basic needs.
Type 4: Growth in natural resources (natural capital). Quantity of biomass (fish, wood etc.) which regenerates through natural processes such as photosynthesis, and the health of the ecosystem functions (fresh water, fertile soil etc.) which enable regeneration — which in turn increases the raw natural materials.
Six
The draft PAS sets out a number of sustainable finance principles: governance and culture, strategy alignment, impact management, stakeholder engagement and transparency.
Everything starts with governance and culture. We like the inclusion of a high-level commitment to purpose which recognises commitment to sustainability: but this must be backed up by metrics which define the organisation’s view of success, in order to ensure accountability and avoid impact washing. Examples of organisations already developing these metrics include B Lab and Future Fit, among others.
Seven
The principle of transparency is core to Project Heather’s strategy. We believe public reporting of impact should be expected: issuers on the Scottish Stock Exchange will be required to report on it annually.
We would like to integrate the OECD’s Social Impact Investment Transparency Principles into this definition of transparency:
- A collaborative ethic has been critical to the success of our efforts to date
- Transparency is essential to preserve that collaborative ethic
- Transparency is essential to scale our efforts
- Transparency requires regular and standardised reporting by all who seek to be accountable for generating a positive impact from investments. (p.17)
We agree with BSI that “improving publicly available information on corporate sustainability not only enables efficient allocation of capital but also helps in building and maintaining trust in the reporting organisation.”
We believe that impact reporting can enhance the transparency of an organisation in line with the SDGs. Requiring companies to address the ways their organisation is maximising their positive impacts and minimising their negative impacts can be highlighted through annual impact reporting. Ensuring a company’s strategy is aligned with a purpose-driven and conscious approach that intends to address their positive and negative impacts can be done through articulating their theory of change. We believe addressing an organisation’s intended path to execute its contextualised purpose should be done with short to long term outcomes projected.
Conclusion
The link between finance and responsibility is developing fast. Financing sustainability is at the forefront of the direction we choose to take and new sustainable finance concepts such as impact reporting can lead the way. Enhancing capital markets to develop ways to finance environmental and social issues is the at the core of what Project Heather does. BSI may have once been synonymous with the safety of household appliances; its role in making our future a safer one is potentially no less significant.
For more information on BSI’s work in this area, please go to: www.bsigroup.com/SustainableFinance. You can find out more about the UK Government’s Green Finance Strategy here.
Important note: the draft definitions extracted from a working draft PAS and must not be regarded or used as a PAS. This draft is no longer current.
