Beyond Compliance 2024

Beyond Compliance: Embedding Impact through Innovative Finance20The significant momentum in the innovative finance segment suggests several scenarios for further market growth. OBF has evolved from development finance into a flexible tool that drives positive social impact across various sectors. Originally developed by multilateral development banks and governments to improve the effectiveness of aid, OBF now helps social enterprises and businesses achieve sustainable goals. The application of this type of innovative finance in the development and public sectors has reached a level of maturity over several decades, offering an evidence base and an established set of tools to facilitate efficient implementation. Over the past 20 years, over $100 billion in finance has been linked to these results, with the World Bank channelling over $58 billion through its Program for Results.51 More recent variations like impact bonds have placed greater emphasis on quality outcomes of services rather than access to services, bringing the private sector on board as investors.52 Impact-linked financing approaches that provide incentives directly to the value creators to reward additional impact have also been used widely to support social enterprises, compensating these market-based organizations for value that has yet to be priced into the traditional market. This experience provides insights as to how social enterprises can be supported to achieve financial sustainability and how commercial companies can be nudged to create deeper social or environmental impact. Although the market is fragmented, $35 billion has already been deployed through various instruments in impact-linked finance. Building on this market experience, some stakeholders are testing the idea of tradeable impact, where social impact credits are valued and traded, thereby democratizing market access. The environmental credit markets, such as the carbon market, exemplify the potential of OBF to standardize and scale. Payment models such as SPCs or exchange platforms like Common Good Market are facilitating the emergence of the social impact market equivalent. In addition to this, companies are adopting advanced accounting methodologies such as Impact Weighted Accounts, supported by business coalitions like the Value Balancing Alliance, to value the impact they are creating. At scale, these efforts can lead to a scenario where impact becomes tradeable and fungible. Despite progress, there have been challenges in OBF market development , including limited outcomes funding availability; difficulty in standardizing how outcomes are defined, measured and valued; problems attributing outcomes to OBF approaches; risks of adverse incentives; inadequate risk-sharing with the private sector; complex stakeholder coordination; and the bespoke nature of deal design. As stakeholders have moved from sustainability to impact-focused transactions, they have found there to be fewer standardized market definitions and benchmarks, a scarcity of historical data on company social performance and inconsistency associated with the context-specific nature of social KPIs. Indeed, the SLL market has been troubled by claims of greenwashing and the cost of verification outweighing the interest rate savings. Looking ahead, the success of OBF will therefore likely depend on the standardization and credibility of existing approaches, alongside continued innovation maintaining flexibility to address diverse social challenges. Some notable learning points from existing practice that can be applied to the corporate application include: –The move to simplification in the OBF design process as transactions are replicated and impact metrics are standardized and shared across stakeholders and actors, creating a common language. The private sector can use experience from the development finance or social innovation field and seek expertise and experience within existing markets to prevent duplication of effort. –The proliferation of outcomes funds supporting multiple contracts simultaneously, accelerating collective learning and impact.53 The UK has led this innovation, hosting half of the world’s existing outcomes funds, with 42 in development globally. The private sector can apply these learning points to develop a programmatic or sectoral approach to cross- cutting and/or shared challenges. –The strengthening of cross-sectoral partnerships, which have emerged as effective vehicles for addressing complex social challenges, with OBF providing both the framework for the compensation of coordination and the governance mechanisms required to scale these collaborations.54 The private sector can apply this learning to inform collaboration with competitors, governments and NGOs to support large-scale social change. –The institutionalization of OBF practices at an organizational level, embedding outcome-focused decision-making into operational DNA.55 The private sector can apply these learning points to inform how companies make better decisions over time to align profit with sustainability and social goals, and scale their impact. Tradeable impact refers to a financial mechanism or market-based solution where specific social or environmental outcomes are quantified, allowing them to be bought and sold.