Recognising that investors need better information about the positive impacts of investments on climate adaptation and resilience, the UNEP FI hosted Adaptation & Resilience Investors Collaborative (ARIC) has pioneered the development of investor-relevant adaptation & resilience metrics over the past year, with the financial and technical support of British International Investment (BII). Working in consultation with a wide range of stakeholders across the development finance and impact investing communities, this work sets out a practical framework for assessing adaptation and resilience impact across a broad range of investments.
Robust information on the impact of investments on adaptation and resilience is essential for mobilising private finance
The need has never been greater. Reported financing flows are way below estimated needs, with an estimated gap of more than USD 387 billion per year to implement domestic adaptation and resilience priorities. Private investors are increasingly aware of the emerging opportunities in this space. Around 11% of publicly listed companies deliver products and services that may contribute towards adaptation and resilience, while the benefits of investing in companies providing these solutions can be up to 15 times greater than their costs. Nevertheless, private investment is still hindered by the lack of clear, practical and investor-relevant metrics that can be used to identify, appraise and prioritise investments that make meaningful contributions towards adaptation and resilience.
ARIC’s adaptation and resilience impact framework is built on collaboration and consensus
ARIC members, consisting largely of development finance institutions, have drawn upon their direct experience of financing climate adaptation and resilience investments with public and private partners. Supported by UNEP FI and the consulting firm Cadlas, ARIC has also consulted with a wide group of private investors engaged in adaptation and resilience, including leading impact investors, and specialist funds. ARIC also consulted with leading industry associations in the field of adaptation and resilience impact assessment, including the Global Impact Investment Network (GIIN), UNEP FI’s Principles for Responsible Banking network, and the Climate Innovation for Adaptation and Resilience (CIFAR) Alliance, amongst others [1].
Practical recommendations drawn from first-hand investment experience
In shaping this work, ARIC reviewed impact assessment approaches across a broad range of its members’ recent direct investments, covering project finance, debt and equity investments, across sectors ranging from agriculture, energy infrastructure, digital to financial services. This ensured the emerging recommendations are fit-for-purpose across a broad range of private investments by providing:
- a practical and consistent assessment framework;
- a robust conceptual approach to embedding adaptation and resilience impact assessment in the investment cycle, drawing upon best practices in impact management; and
- a set of clear, aggregable metrics that can be used to assess and manage adaptation and resilience impact across investment portfolios.
Five key elements central to ARIC’s proposed approach to assessing the adaptation and resilience impact of private investments
1. Define the adaptation and resilience impact pathway, explaining how the immediate outputs of the investment can contribute towards improved adaptation and resilience and how these contribute to the overall adaptation and resilience impact of the investment.
2. Integrate adaptation and resilience impact assessment into the investment cycle in line with the recommendations of the Operating Principles of Impact Management. This involves setting clear adaptation and resilience objectives at the beginning of the investment cycle, defining the investment’s expected contribution to adaptation and resilience impact and how it will be delivered, as well as monitoring and managing that contribution across the investment time horizon. Impact is then assessed at investment exit, with lessons learned and applied to future investments.
3. Assess adaptation and resilience impact across the Five Dimensions of Impact developed by Impact Frontiers.
- What: Which outcome the enterprise is contributing to, whether it is positive or negative, and how important the outcome is to stakeholders.
- Who: Which stakeholders are experiencing the outcome and how they are served in relation to the outcome.
- How much: How many stakeholders experience the outcome, what degree of change they experience, and how long they experience the outcome.
- Contribution: Whether an enterprise’s and/or investor’s efforts results in outcomes that were likely better than what would occur otherwise.
- Risk: The likelihood that the impact will be different than expected
4. Assess adaptation and resilience impact in terms of the positive contribution to the resilience of people, planet or economy. These terms reflect how investments improve the climate resilience of individuals or communities (people), of natural systems (planet), and of economic assets and activities (economy). This allows different kinds of investors to integrate the potential adaptation and resilience benefits of investments. For example, development finance institutions may focus on vulnerable people and communities, while specialist investors may focus on ecosystem resilience and its knock-on effects on human systems, and commercial financial institutions may wish to demonstrate economic and business resilience to mobilise capital.
5. Use clear and consistent metrics that can facilitate adaptation and resilience impact across portfolios, which facilitate the aggregation of adaptation and resilience impact across multiple investments at the portfolio or sub-portfolio level, allowing investors to manage their portfolios effectively and optimise their overall adaptation and resilience impact.
Complementing and supporting other related initiatives on adaptation and resilience impact assessment
ARIC’s approach has been designed to align with other related initiatives such as the GIIN’s emerging Climate Adaptation and Resilience metrics, developed for the IRIS+ impact assessment framework – by allowing investors to aggregate granular impact information generated by the GIIN’s metrics across their portfolios. While the guidance is focused on private equity and venture capital, it has the potential for wider impact. For example, ARIC’s approach may provide valuable lessons on clear and actionable metrics for the emerging Climate Bonds Resilience Taxonomy being developed by the Climate Bonds Initiative, and will also serve as a basis to provide useful resources for adaptation and resilience-related initiatives in the banking sector, through the Principles for Responsible Banking climate adaptation target-setting guidance.
Further opportunities to support and enhance the objectives of adaptation and resilience impact assessment will arise across the financial system – for example, private equity, venture capital, fixed income, bond markets, banking, or insurance. Different approaches to the application of adaptation and resilience impact metrics across these types of investment operations will need to be balanced against coherence and an appropriate level of harmonisation.
Looking forward: mainstreaming adaptation and resilience impact assessment across the finance sector
While ARIC’s guidance has an initial focus on private equity and venture capital, it has been further refined in consultation with a wide range of banks, private investors, standard setters, impact frameworks and academics. This consultation process has pointed the way towards greater integration of this adaptation and resilience impact assessment approach in intermediated investments. Intermediated financing can be used by investors to amplify the impact of their investments, for example by leveraging the ability of banks to reach large numbers of smaller clients such as small businesses and households. ARIC will also support opportunities to ensure that adaptation and resilience impact assessment is embedded into the evolving climate information architecture for financing, by supporting efforts led by organisations such as the Global Environment Facility and UN Climate Champions. With climate change impacts intensifying, the ability of investors to credibly demonstrate the real-world adaptation and resilience impact of their financing will only grow in importance.
[1] The stakeholders consulted in this exercise are: 60 Decibels, Aspen Network of Development Entrepreneurs, Catalyst Fund, Climate Bonds Initiative, Climate Champions, Climate Collective, Climate Fund Managers, Factore, Global Impact Investing Network, Helios, International Platform on Adaptation Metrics, Invesco, Islamic Development Bank, MUFG, Oxford University, PRI, Sagana, Standard Bank, UNDRR and UNEP.