Beyond Compliance 2024

Beyond Compliance: Embedding Impact through Innovative Finance13This chapter explores specific examples of the application of innovative funding approaches that link payments or investment returns to the achievement of specific, measurable social and environmental results, in order to address the challenges outlined above. Known as outcomes- based funding (OBF), these approaches can be applied to a transaction, programme or organization to support better decision-making for positive social and environmental impact. OBF is a structuring practice that guides the design and implementation of financial instruments or transactions to achieve social and environmental outcomes, as illustrated by the following exhibit. How outcome-based funding approaches work FIGURE 3 Identify social challenge Allocate budget Engage partner or platform Generate and verify outcomesReward and reinforceEvaluate and iterate 41 2 3 56Identify social challenge: Company's recognition of a material social or environmental issue in its impact sphere. Allocate funding: Budget is committed to support a meaningful solution.1 2 3 4 5 6Engage partner: Social enterprise/supply chain partner or social impact platform initiates activity to solve the challenge. Generate and verify outcomes: Social outcomes are produced and verified through third-party evaluation. Reward and reinforce: Company makes payment to partner based on verified results. Evaluate and iterate: Company assesses impact and identifies further opportunities or adjustments. Outcome-based funding (OBF) includes a suite of instruments that range from those where payments are contingent on verified outcomes – like results- based finance (RBF), impact bonds (IB) or biodiversity credits – and those where investment terms are linked to achievement of outcomes – like impact- linked loans (IIL), social success notes (SSN) or social impact incentives (SIINCS). Definitions and examples can be found in the Annex and on the accompanying website. These instruments have evolved differently in development and private sector contexts. In development, they typically focus on service delivery and public good creation, while in business settings, they increasingly reward companies for verified positive impact within their operations and supply chains. Impact-linked finance (ILF) represents one approach where market-based organizations are incentivized for creating additional social value.30 By embedding OBF transactions within core business models, companies can scale impact initiatives across operations and supply chains, creating a sustainable framework for addressing large-scale issues. Scalable OBF models streamline impact integration into core business operations and support long-term change that aligns with broader industry goals for sustainable development and corporate accountability. Due to their size, large companies can achieve substantive change, but incremental action is unlikely to address the multiple transformations of our time within the timescales needed. These require broader collaboration by companies with competitors, civil society and governments to create large-scale, step-change solutions that no single entity could achieve independently. So, while OBF can be applied to any single organization, project or portfolio of investments to support better decision- making, OBF can also be used to address a specific challenge within a wider collaborative process to unlock or accelerate change. There is an abundance of use cases for the application in the core business operations and supply chains of companies. The use cases that follow give an indication of how OBF can be and has been applied to specific opportunities and challenges. The use cases bridge theory and practice, offering concrete insights into how OBF solutions deliver value in specific settings.