Sustainable finance: how billionaires are pioneering a total impact approach

The Covid-19 crisis has accelerated a process of reprioritising sustainable business activities. This has propelled ESG reporting and the goal of enhancing net impact across multiple activities to the top of billionaires’ agendas. The PwC Partners Survey that forms part of the Billionaires Insights report indicates that the most common measure taken by billionaires in ESG (environment, sustainability and governance) terms relates to corporate governance and ESG reporting. Not only that, but almost three-quarters of the billionaire clients surveyed for the report said that ESG factors had become more important in their investment decisions. ESG information and disclosure are thus an important connection point with investors.

Multiple forces driving greater corporate responsibility and transparency

Developments like this are a key driver of greater corporate responsibility and increased transparency on the net positive and negative impacts of business activity. They’re also reflected in market demand and public opinion, as well as in increasingly prominent regulatory changes. The responses from study participants point to a process of transformation in ESG and sustainability reporting accelerated by two factors: a paradigm shift within the financial industry driven by changing customer demands; and growing regulation related to sustainable finance, including formal legislation, industry self-regulation and soft laws. Indeed, this transformation is so well advanced that it’s no longer a question of whether to disclose sustainability-related information, but how to improve its quality and comparability.

What standards and guidance are available?

As a result, mandatory and voluntary reporting standards are gaining weight, with investors increasingly expecting companies to disclose more comprehensively on a variety of ESG matters and indicators. Evidence for this can be found in the discussion on and introduction of more refined binding non-financial disclosure requirements and recommendations and guidelines by regulators (for example in the EU). On the other hand, voluntary commitments such as the recommendations from the FSB’s Task Force on Climate-related Financial Disclosures aim to provide a more comprehensive standard for reporting on the crucial issues of climate-related risks and opportunities. The TCFD disclosures have set an increasingly widespread transparency standard that is used by both investors and the public to evaluate impact. Further initiatives are on their way, including the Task Force on Nature-related Financial Disclosures in relation to impacts on biodiversity.

Financial institutions are also expected to assess and disclose sustainability risk and impact – not only on the corporate level, but for individual products and services as well. Different tools, such as scenario analysis, have been developed to assess ESG impact on the portfolio level. Legislators are also increasingly requiring more transparency on sustainability matters. New groundbreaking legislation from the EU refines the status quo and introduces various sustainability-related disclosures for financial products, complemented by a science-based green taxonomy providing standard definitions for environmentally sustainable economic activities. These disclosures aim to provide more transparency for individual investors on the impact of their investments in sustainability terms, including the introduction of defined quantitative indicators. This could be a great opportunity for investors to better assess the sustainability impact of their investment decisions.

Beyond merely ‘doing good’: how to measure and report on impact

Current developments are prompting investors to look beyond merely ‘doing good’ and instead expect a more tangible, measurable form of impact from their investments. In our work we support our clients with tailored approaches to measuring and reporting on their impact that match their personal and business objectives and circumstances.

One way of assessing the impact of giving and investing is to differentiate between ‘do good’ and ‘do no harm’ activities. Whereas the former actively seek a positive impact, the latter aim to avoid certain adverse effects on the environment and society. This means that measuring and reporting on these activities may require different approaches.

While assessing ‘do no harm’ involves defining ESG indicators and thresholds for identifying and mitigating the negative impacts, ‘do good’ activities focus on achieving a measurable positive impact. In the investment context, ‘doing good’ can be associated not just with impact investing and philanthropy investments, but can also be integrated into other investment strategies (for example in combination with active engagement and voting). The ‘do good’ impact on sustainability matters is increasingly defined using qualitative and/or quantitative indicators.

It’s also possible to adopt a combined approach. This is the route taken, for example, in the EU Green Taxonomy, which considers an economic activity to be environmentally sustainable if it substantially contributes to at least one of six pre-defined environmental objectives based on scientifically defined requirements. At the same time, the activity has to fulfil the principle of ‘doing no significant harm’ to any of the other five environmental objectives, and has to comply with minimum social safeguards. The underlying assessment processes build on specific performance thresholds and technical screening criteria developed by a technical expert group.