Beyond Compliance 2024

Beyond Compliance: Embedding Impact through Innovative Finance4Executive summary Companies face mounting pressure to deliver both financial returns and positive social and environmental impacts. 72% of CEOs report increased demands for transparency in sustainability, while 83% expect improved performance from sustainability investments. 70% of younger employees prioritize corporate values in their job decisions. Regulatory pressures on supply chain due diligence increasingly require companies to consider impact as an essential component of financial and risk management. Merely complying with these requirements will simply add costs without reaping any benefits of actively managing social and environmental impact. Lessons from innovative finance – specifically the $185 billion outcome-based funding (OBF) market – offer fresh inspiration for operationalizing non-financial objectives. These approaches link payments or investments to the achievement of specific, measurable, and hence auditable results, creating actionable insights for aligning business, finance, risk and impact. Leveraging innovative finance to tackle corporate challenges Potential applications of innovative finance span various areas of corporate operations. They include: –Risk and compliance: Global supply chains are under scrutiny, and an estimated $970 billion is exposed to risks related to environmental and social issues. Through innovative finance, companies can align incentives with compliance, foster transparency, and build accountable, impact- focused partnerships with suppliers. –Product and service growth: Addressing the Sustainable Development Goals (SDGs) could unlock a $12 trillion market. By integrating financial incentives for impact, companies can support long-term growth and maintain mission alignment as their positive-impact products succeed in the marketplace. –Corporate and supply chain finance: Sustainability-linked finance is already widely deployed by corporations. Innovative finance can help address significant issues in areas such as greenwashing and impact-washing by using credible, verifiable outcomes. Companies may also choose to link financing for suppliers to impact goals, improving marginalized suppliers’ access to capital and creating more sustainable supply chains. –Talent and skills: As global transformations drive demand for new skills, especially in emerging markets, innovative finance can help companies meet critical talent needs. Aligning training with market demand and lowering barriers for marginalized groups are just a few ways to support skill-building. –Innovative corporate philanthropy: More and more corporations aim to align philanthropic goals with their strategic objectives. Innovative finance mechanisms integrate these goals effectively, fostering social impact aligned with core business goals through streamlined measurement and financial rewards. A maturing market and ecosystem for impact finance: Innovative finance has been developed for decades. The results-based funding market is now valued at around $150 billion and private-sector impact-linked finance at $35 billion. Sustainability- linked loans and bonds mobilize $600 billion annually by connecting funding with environmental performance indicators. This momentum for innovative finance can contribute towards scaling successful solutions for societal issues. That being said, it is also important to note its limitations. These include a tendency to focus on impact “transactions” – an overly simplistic, linear approach to impact from input to output that, if not used carefully, risks only addressing symptoms while reinforcing inherently unjust structures. If innovative finance goes hand in hand with bold action to explore truly systemic solutions, it can help to scale these solutions once they are proven in principle. Following the path of carbon credits, it can enable verified impact to become tradeable in the future. Existing projects, such as the SK Group’s $50 million efforts for social impact in South Korea, offer opportunities to learn from established expertise and tools, allowing them to address social issues without overhauling existing processes. These mechanisms can help companies operationalize sustainability by creating performance measurements and incentives, ultimately unlocking opportunities to create social and environmental impact across value chains.Companies are pressured to balance profit and impact; innovative finance can help turn pressure into a competitive advantage