White paper | March 2022

Define. Align. Refine.

A framework to mobilize impact investing and strategic philanthropy for a better world

At a glance

Despite a growing acceptance of the need to transition to a more sustainable future, the level of funding needed to secure that transition is still falling far short of what is required and many of the most critical challenges remain unsolved.
We believe that one way to address that shortfall is to look towards the principles and tenets which underpin philanthropy and impact investing.
In this paper we explore the scale of the challenge, from the breaching of planetary boundaries to the urgent need to provide minimum social standards. We set out ways in which we believe we can borrow from the concepts of impact finance and apply them, at scale, across a broad range of stakeholders and capital pools to develop outcomes-oriented solutions designed to direct funding to where it is needed the most.

The full white paper

Podcast

Define. Align. Refine. Julie Hudson and Andrew Lee on the power of impact investing and philanthropy

00:00

Julie Hudson and Andrew Lee discuss the need for investment capital and coordinated action to achieve a more sustainable future and avoid the worst consequences of global warming.

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Source: Monocle, for more podcasts visit https://monocle.com/radio/shows/the-bulletin-with-ubs/392/

Key takeaways

Financing the transition – challenges persist

While humanity may have become wealthier and healthier, with greater freedoms than ever before, inequalities continue to rise, social unrest is growing and many of our planet’s ecological limits are being breached.

Governments are offering help – assistance from the OECD’s Development Assistance Committee rose to an all-time high of USD 161.2 billion in 2020. Private capital is contributing - philanthropic donations have reached USD 1.5 trillion and are growing. But this is still nowhere near enough. The UN estimates that USD 5 to 7 trillion per year is needed between 2015 and 2030 in order to meet the Sustainable Development Goals (SDGs). But there is an annual funding shortfall estimated at some USD 2.5 trillion, a figure which the OECD believes has likely increased to USD 3.2 trillion during the pandemic. Faced with this yawning funding gap, private capital is increasingly being mobilized and directed toward combatting a whole host of economic, environmental and social ills that have either gone unaddressed by traditional finance or have been underserved by government and philanthropic initiatives. Yet nearly two-thirds of all assets under management still intentionally decline to take ESG or sustainability into account as part of the investment decision-making process. Furthermore, many traditional ESG investments fail to bring about any meaningful real-world change.

Impact investing and philanthropy: showing the way

We therefore believe a different approach is needed if we’re going to bring about the fundamental transformation required for a sustainable future. We argue that impact investing can offer the blueprint we need to frame that approach.

Impact investing has emerged as the next great frontier for both finance and development cooperation. While it represents a powerful force for positive change, it is still far too narrow in scope and too modest in scale to provide that USD 5 to 7 trillion per year of funding which the UN says we need if we’re to achieve the SDGs globally by 2030.

This presents us with an opportunity and an imperative – the scaling up of impact finance. This means not only driving more private capital into philanthropy and impact investing but also utilizing key features of these approaches to transform other areas of finance and society.

Scaling up the impact

Achieving tangible and lasting outcomes is going to take more than capital alone. Collaboration from all stakeholders is called for. From public policymakers, corporate decision makers, investors and consumers, a concerted and deliberate shift of intent will be needed.

So we are proposing a three step approach which employs systems based thinking to leverage the proven principles and tenets of impact investing and philanthropy across a broader range of capital pools and stakeholders. We summarize it as Define. Refine. Align

What’s key to this framework? Three things:

Define:

Determining needs and identifying resources.

There is a finite space in which humanity can safely operate if we are to secure a sustainable future. This space is defined by an environmental ceiling - planetary boundaries which we cannot cross without threatening our planet’s resources – and a social floor, which defines a minimum quality of life. Operating effectively within these boundaries demands systems based thinking. By focusing our efforts on the planetary boundaries that have already been breached while maintaining a systems perspective that acknowledges the need to provide a social floor, impact investing and philanthropy have the potential to produce the cascade of innovations and ideas needed if we want to reset our current trajectory, currently on course to breach the limits of both the ceiling and the floor.

The image portrays the environmental ceiling comprised of SDG goals 13, 14 and 15, which covers climate, land and water protection, as well as the social floor, including SDG goals 1,5,10,16 and 17 – designed too reduce inequalities. The space within shows SDG goals 2,3,4,6,7,8,9,11 and 12, designed to ensure facilities, services and activities are affordable and fairly shared

Align:

We are not simply proposing an expansion of the impact finance segment. Instead, we propose that the ideas and ideals that lie at the core of impact investing - Intentionality, Additionality and Measurability - should be leveraged to influence the entire ecosystem that drives investment decision-making and corporate activity.

The evolution of sustainable investing provides an opportunity to integrate these three principles. Exclusionary, divestment and “tilting” strategies that dominated for decades are no longer front and center. Rather than simply using “exclusionary” screens that prohibit investments in companies on the basis of specific screening criteria, for example, fossil fuels, investors can develop “inclusionary” screens. These would identify companies and projects that have proactively committed to certain positive actions that align with the investor’s intent.

Furthermore, many investors are now demanding strategies with a clear purpose: strategies that put “intentionality” at their core. This mean the investment industry is therefore being forced to rethink a previously narrow stakeholder view that placed themselves, as shareholders, at the center. An expanded stakeholder view poses the question: what’s possible and appropriate when it comes to delivering positive outcomes for society and the environment?

Intentionality: Leaving nothing to chance

Investors are increasingly demanding strategies with a clear purpose: strategies that put “intentionality” at the core.

Additionality: Above and beyond

Once capital is allocated toward a stated goal, stakeholders can then center their attention on maximizing achievable change.

Measurability: Impact requires accountability

Measurement provides the basis for demonstrating the difference that investments or actions can have toward targeted impact, which is a critical element in alignment.

Refine:

Arguably, the risk of siloed approaches to problem solving has only increased in recent years. A laudable environmental objective can be directly linked to destructive social outcomes unless there is an attempt to remedy the wider consequences of the policy. Due to the interconnectedness of economic, environmental and social factors, the quality of overall outcomes derived from social and environmental initiatives can be substantially improved by moving from a focus on narrowly defined initiatives to coordinated outcomes. (p. 41)

To support this way of thinking, we have identified a set of levers and actions which different stakeholders can adopt. While not exhaustive, we believe they offer actionable starting points, some of which we outline here. Asset owners, for instance, may want to allocate more capital to investments with longer time horizons to encourage and allow enough time for change. Public policymakers can provide structures that incentivize positive change and discourage practices and behaviors that hinder global efforts to improve the world. Financial intermediaries can play their part by gathering and sharing outcomes data to illustrate effective interventions, share learnings from ineffective interventions and provide a baseline from which to standardize measurement methodologies. Corporates meanwhile can seek opportunities and develop business plans that allow for fair treatment of workers, improved resource efficiency and higher quality, repairable products, while all of us, as concerned citizens, can vote with our wallets by supporting companies that treat their employees fairly and have products and technologies that will help to protect planetary boundaries and avoid harming the environment.

Does (or may) cause harm

A

Act to
avoid Harm

“ I have regulatory requirements to meet
(e.g., I have to cut my carbon emissions).”
“ I want to mitigate risk.”
“ I want to behave responsibly.”

While it largely focuses upon avoiding negative externalities generated within one particular area of interest, this model can be extended more broadly to include other ESG focus areas.

B

Benefit
stakeholders

“ I want to have a positive effect on the world to sustain long-term financial performance.”
“ I want a world where all businesses try to have a positive effect on society.”

Examples of benefits include proactively upskilling employees, or selling products that support good health or educational outcomes in pursuit of financial outperformance over the long term (often referred to as ESG opportunities).

C

Contribute
to solutions

“ We want to help tackle malnutrition in Africa.”
“ We want to help tackle the education gap.”

Directly enabling an otherwise underserved population to achieve, for instance, good health or educational outcomes can contribute.

Video

In this conversation, we dive a bit deeper into impact metrics in an attempt to address the difficult question: How can investors have impact? Take a look at the discussion featuring Annabel Willder, Sustainability and Impact Institute, UBS, Sam Duncan, Co-Founder and CEO, Net Purpose and Tom Adams, Chief Strategy Officer, 60 Decibels.

Discover more from the Institute

Visions

In our paper we featured ten global visionaries, these are Entrepreneurs and thought leaders working to achieve the 17 UN sustainable development goals. UBS supports them to scale their positive impact.

Diet Change, Not Climate Change

Green Monday, David Yeung, Founder and CEO

Growing green bricks

Ginger Krieg Dosier, Biomason President & CEO

Building outbreak resilience

Dr. Kamran Khan, BlueDot Founder & CEO

Learn more about the UBS Global Visionaries

ubs.com/globalvisionaries

Contact us

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Define. Align. Refine. Julie Hudson and Andrew Lee on the power of impact investing and philanthropy

Financing the transition – challenges persist

Impact investing and philanthropy: showing the way

Scaling up the impact

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