For impact investors, the discomfiting thrum for expanding reach and achieving scale reminds us of the immensity of our social and environmental challenges. Two decades of creativity and deep collaborations have brought the field of investing for good a long way; it also reveals how much remains incomplete. The evidence overwhelms us. The rate and size of global transformations necessary to meet the SDGs, standardize impact metrics, and assure veracity in reported impacts requires more of us including better public policies.
Why? Public policy is scale; it can help attract more investments, more quickly, with more confidence of impact by: 1) establishing a common set of ground rules to better understand and manage risk, and comparability of investments; 2) creating incentives and disincentives for investors and their investees to ensure impact and dissuade impact washing; and, 3) directing public resources to complement and catalyze private impact investments.
Potential and enacted public policies to address these issues frequent the industry and academic literature, while actual, proposed, or considered policies are prevalent in many of the developed nations., These efforts focus on government actors and agencies (authorized by public policies) to help increase the supply of, and demand for, impact capital through incentives to reduce the costs of capital and government-backed products. A growing area for government focuses on impact predictability and improved risk management by supporting a common set of impact metrics, and the reporting of and, in a few cases, accounting for them whether by the investor or investee.
Yet, often overlooked or underplayed in public policy and impact conversations are three interrelated issues: 1) verification of reported impacts including compliance and enforcement; 2) active management of impacts, negative and positive; and, 3) substantive roles for the non-investment, non-customer stakeholders in impact decisions (from planning to operations, and measurement and management of impacts). Their absence in public policy reduces the opportunity to ensure if positive impacts are occurring and negative impacts reduced, and if the impacts that do occur matter in terms of scale as well as relevance to the communities incurring them.
The rate and size of global transformations necessary to meet the SDGs, standardize impact metrics, and assure veracity in reported impacts requires more of us including better public policies.
These issues are not new to impact and socially responsible investing. They are key principles guiding Social Value International, and embedded in the Global Reporting Initiative, the SDG Impact Standards, and the IFC’s Operating Principles for Impact Management. However, use of and participation in these are voluntary. The state-of-the-world testifies to the insufficiencies of voluntary efforts alone.
As with many policy change endeavors, some level of norming behavior, expectations, and skill development are necessary antecedents to, and complements of, successful policy change. The past twenty years set the stage, creating a common understanding and revealing where, and where not, public policies need to accelerate impact at scale. Public policies need to build on and enhance those efforts, and only replace or supersede them when they reduce or prevent stakeholder understanding of, and power to influence, impact risks.
Let’s turn briefly to the first of three impact gaps public policies could address – assurance, verification, and enforcement. Future articles will address the other gaps.
Assurance, Verification, and Enforcement
Individual high wealth investors committed to impact investing, institutional investors purchasing shares in companies with high ESG ratings, or individuals wanting socially-responsible retirement funds, trust in the veracity of the impact is explicit in the transaction. In each case, the investor relies on the judgement of the general partner (or intermediary), the ESG rating company, or the institutional investor managing the retirement fund.
Given the massive environmental and social challenges we face, and the necessary scale to meet those challenges directly, we cannot wait for the market alone to moderate its excesses. We need to complement and improve the private sector efforts with effective, efficient public policies.
Such trust may be informed by principles such as the IFC’s Impact Principles and backstopped by a voluntary third-party assurer (e.g., BlueMark). The question is whether this is adequate to protect investors and the communities impacted by their investments. Are the consequences of noncompliance, of not meeting promised impacts and outcomes, sufficient? Do investors “punish” such noncompliers by not investing in them? In such cases, failure to meet the promised impacts or outcomes may be consequential to the investee and the investors; it is of consequence to the communities being impacted.
For the bigger public markets, where any institutional investor can sell an ESG fund without consequence for noncompliance, what should be the role of public policy? Who should get punished for noncompliance – the investor, the ESG rating company providing company ratings to the investor, the companies that provided the ESG rating companies with their input data? And what is considered noncompliance? Inaccurate data on one ESG factor, several ESG factors?
Tough and important questions that need our collective response. Given the massive environmental and social challenges we face, and the necessary scale to meet those challenges directly, we cannot wait for the market alone to moderate its excesses. We need to complement and improve the private sector efforts with effective, efficient public policies. Ones that require adherence to a set of well-vetted and supported impact principles and standards (like SDGs and IFCs) or to those of public benefits corporations (and its supporters like B Lab) accompanied by state-backed enforcement mechanisms for noncompliance. Yes, the devil is in the details, thus all the more reason for our collective response, one that serves the common good.
That said, adequate assurance and consequences for noncompliance are insufficient without addressing the other gaps – substantive engagement of all stakeholders, and tracking and managing impacts that matter. These gaps will be taken up in future articles in the series on public policy and impact.
 See for example: 1) Pacific Community Ventures 2020 publication, Meeting the Moment: U.S. Impact Investing Policy, Inequality and COVID-19 Recovery, and its 2021 report, Impact at Scale: Policy Innovation for Institutional Investment with Social and Environmental Benefit 2) The 2017 Pepperdine Law Review’s The Government’s Role In Unleashing Impact Investing’s Full Potential ;’ 3) Urban Institute’s 2021 publication, Strategies for Advancing Impact Investing through Public Policy; and, 4) OECD’s 2019 report, Social Impact Investment 2019: The Impact Imperative for Sustainable Development,
 See for example, the EU’s Sustainable Finance Strategy, the US’ SEC’s Response to Climate and ESG Risks and Opportunities, and the IFRS Sustainability Reporting project.
 See footnote 2