About impacts, horses and zebras

"Your organisation is like a horse, a very useful animal. Why do you try to be a zebra?"

The thought crossed my mind when observing some wholly or partially publicly owned financial institutions that finance small and medium sized private enterprises. These institutions' owners and stakeholders expect them to operate profitably and responsibly. In addition, they often expect these institutions' investments to generate wide, tangible benefits for societies and the environment.

In many cases, the institutions' management works hard to answer the call. The institution has adopted environmental and social responsibility policies in line with the latest requirements and best practices, and written internal guidelines. It has set impact goals for investments, linked for example to the Paris Agreement and the UN Sustainable Development Goals, and created indicator frameworks and tools to assess, monitor and report on the results. Everything according to textbooks. Still, it has often failed to deliver what was expected.

Sure, they operate responsibly, though challenges sometimes appear when they finance very small companies. Such investees may be innovative and have groundbreaking technologies and business models but often lack resources and expertise needed for proving and reporting their responsibility. Some are in so early phases of business development that assessing the actual responsibility is difficult.

The problem emerges when these financial institutions claim tangible impacts of their investments on the high-level policy goals like SDGs. The alignment with responsibility criteria (based on e.g. sector or technology, like EU taxonomy) does not guarantee such impacts. It does not prove that the financing is additional (meaning for example, that there would not have been financing on similar terms or quantities available in the market). And if there is no additionality, it is hard to prove that exactly these institutions' financial inputs create a change that would not have occurred otherwise. Proving additionality is far from easy, but at least there should be some kind of evidence, methodology or narrative to indicate it. Often this is not the case.

Even if there are impacts, the attribution of those impacts to a separate financial input very early in the value, causal or contribution chain, or to a financing tranche having a minor role in a larger package, is difficult. For example, if you finance a renewable energy project developer, you cannot attribute the quantify of the greenhouse gas emission reductions later achieved by the renewable energy plant to your financing in a credible or feasible manner. After the developer's involvement the project may have been bought and the plant financed and built by other parties with a much more direct role and more risk exposure. Their claim for the impacts would be stronger. The same is true in case the financing is used for e.g. operational expenses (for example, strategy or business plan development, or strengthening the company's human capital) instead of a greenfield project actually building something new and tangible. Such financing may affect the financed companies themselves, not necessarily the final outcomes like GHG emission reductions or higher- level goals like SDGs in any discernible or quantifiable way.

The point is that it is not even necessary to be able to show such high-level impacts. The changes at the company level are valuable in themselves. They may include improvements in efficiency, processes and skills, proof for the viability of their business model or technology, scale-up of operations and so forth. If such improvements can be achieved in companies that are already assessed to be responsible because of e.g. the sector they operate in, or the technology they use, it is good enough. No need to show anything fancier, like exact impact quantification or similar…

An advice to financing institutions: Do not overreach! Do not try to claim and attribute to yourselves the high-level impacts which cannot reasonably be derived from your inputs. Focus on the actual, investee level results. Develop realistic targets and sensible indicators for the investee's business success, for its ability to scale up its operations, for its ability to attract additional finance etc. Try to ensure that you can monitor such results even some years after your exit from the company, or after the repayment of the debt.

And an advice to the owners and stakeholders of public financing institutions: Do not overdemand! It is tempting, in a world in which private sector is given roles beyond the traditional generation of return and profit, to expect publicly owned institutions financing small enterprises to show that their investments generate wider tangible impacts. But it is not wise to force public financiers to hunt for impacts when such impacts are not attributable and/or cannot be evidenced. It can erode the role and reputation of the institutions you try to guide, frustrate the staff, and lead to credibility losses of the whole sustainability-driven part of the financing industry.