The impact economy: a path towards a more inclusive system

Sustainable development has been on the agenda for decades.?But achieving the positive impact needed to meet the United Nations Sustainable Development Goals (SDGs) and Paris Agreement takes systemic change, and that hasn’t been materializing fast enough. Governments, civil society and corporations all agree – we need to move swiftly to tackle this issue.

Sustainable development has been on the global agenda for decades, escalated by the ratification of the United Nations Sustainable Development Goals (SDGs) in 2015. But despite a flurry of activity across sectors in support of society and the environment, fundamental change just isn’t happening fast enough for the transformation that’s needed.

The Paris Agreement and SDGs defined the sustainability-focused objectives that our society needs to strive towards, but creating?measurable and meaningful impact remains a challenge. That’s not to say that there aren’t numerous successful efforts. At UBS, for example, the activities of our Optimus Foundation improved the wellbeing of 3.7 million children around the globe in 2020 alone. No, the issue is that these activities aren’t creating the scale and level of systemic change needed to create an equitable future for all. Surely we have to question whether our system is properly suited to the task, or whether our pursuit of economic value is stifling the fulfilment of our social values.

Since the dawn of industrialization, we’ve treated our planet like an infinite resource. Structural advancement and financial gain has all too often come at a heavy cost to the environment and society. Admittedly, this approach has served some but it hasn’t helped the many. With runaway climate change, natural resource depletion, increasing inequality, and a widening gap between the rich and poor, this approach simply isn’t viable over the long-term.

?The remedy is a more inclusive market economy, one that serves people, planet and shareholders in equal measure. An economy where practices, policies and standards are applied to social and environmental outcomes with the same force as those attached to financial profit. In that way we start contributing to tangible positive impact across all three dimensions of environmental returns, societal returns and financial returns,

?Actually reaching this aspiration will take a reshaping of our current economic system. Non-financial factors will need to be represented on corporate balance sheets alongside financial factors, so that we can start to measure, and more importantly, manage, impact. In this purpose-driven model, impact is placed front and center and business models focused on value creation for all stakeholders are promoted, the ultimate goal being a balance of “risk, return, and impact”[1]

?Until we get closer to this system, our ability to work towards sustainability objectives will remain hampered. But don’t misunderstand me. This system isn’t one in which profit takes a back seat. Absolutely not. It’s?one where social and environmental impacts are given a seat at the table alongside financial profit.

?“In an impact economy, consumers and shareholders will challenge entrepreneurs and executives to show that they generate their profits in a manner that contributes to the public good”[2]

?Transforming our current economic paradigm won’t be easy. But the financial sector is ideally positioned to lead this transition and we’re already on the way. As an industry, we’ve been quantifying climate and social risks for years. Now we’re partnering to create a methodology that allows us to monetize our impacts – an essential step on the path towards an impact economy. The financial sector, plays a crucial role in valuing assets and pricing risks, as well as mobilizing funds to areas most in need. In fact, the estimated total global investment required to realize the SDGs by 2030 is $7,5 trillion p.a., with the private sector expected to contribute $6,5 trillion of this figure. And the financial sector alone is expected to add?$2 trillion p.a. (2,5% of AUM). Once we start to measure and monetize impacts, we’ll be able to look at them alongside risk and return – and consider all three elements in tandem - thereby unlocking large sums of capital for the world’s 2030 Agenda.

Now we can’t transition to an impact economy without other sectors and market players supporting this effort. Social entrepreneurs, in particular, are important contributors to the growth of the impact economy because they target environmental and social change and build impact oriented business models to do that. These models meet the demands of modern consumers. They want more transparency and accountability from corporations and the purchasing power they hold is a critical lever. .

Regulators and governments are also crucial as they set the frameworks in which this system operates. They can directly influence the behavior of economic actors and can foster an encouraging environment for social entrepreneurship. It’s this group who, alongside scientists and the UN, created the SDGs and Paris Agreement. So it’s up to them to make the policy decisions needed to define the accounting standards and reporting activities which corporations need to implement if we’re to create the transparency required for an impact economy to flourish.

That’s why UBS, has partnered with Harvard Business School, Impact Institute, ABN AMRO, Danske and DBS, to help build the foundation for this transition. The next steps in our journey will be critical – and they won’t be easy, but through our work to build the rules for impact transparency for the banking sector, we are doing our part to lead the way to an impact economy.

1.https://www.rsm.nl/fileadmin/Images_NEW/Erasmus_Platform_for_Sustainable_Value_Creation/WP_Impact_Economy__1_.pdf

2.https://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights/catalyzing-the-growth-of-the-impact-economy

This material is provided solely for informational purposes and has not been prepared with regard to the specific investment objectives, financial situation or particular needs of any specific individual. Readers should not construe the contents of this material as legal, tax, accounting, regulatory, or other specialist or technical advice on services or investment advice or a personal recommendation. No representation or warranty, either express or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein.

Neither UBS nor any of its directors, officers, employees or agents accepts any liability for any loss or damage arising out of the use of all or any part of this material or reliance upon any information contained or provided herein.