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Episode 21: The Positive Impact Initiative

 

On this show, Whitney McWade, Senior Advisor, Sustainability Strategy, Disclosure and Impact Measurement at BMO, talks with Careen Abb from the United Nations Environment Program Finance Initiative.

Careen leads the Positive Impact Initiative (PII), which is a think and do tank at the United Nations. The PII aims to capitalize the finance sector’s ability to finance sustainable development and the transition to an impact-based economy to achieve the Sustainable Development Goals (SDGs). For the PII, Careen has co-authored “Rethinking Impact to Finance the SDGs”, a seminal paper which sets out the PII’s unique theory of impact. She led the development of the principles for the positive impact finance, which proposed a holistic approach to impact management. Careen talks about this holistic approach, the PII’s theory of impact, and how it can influence the financial sector

 In this episode:

  • What the Positive Impact Initiative is and how it influences sustainable finance

  • The role of the financial sector in achieving positive impact goals

  • The principles for Positive Impact Finance

  • How to integrate impact into business


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TRANSCRIPT

Careen Abb: The more positive impacts are delivered or the more negative impacts are avoided, the more revenue there basically is and so hence, you know, the delivery of positive impacts and the reduction of negative impacts is part and parcel of the business proposition. It becomes, you know, the purpose of that business activity because that is what will generate revenues.

Michael Torrance: Welcome to "Sustainability Leaders." I'm Michael Torrance, Chief Sustainability Officer with BMO Financial Group. On the show, we will talk with leading sustainability practitioners from the corporate, investor, academic and NGO communities to explore how this rapidly evolving field of sustainability is impacting global investment, business practices and our world.

Disclaimer: The views expressed here are those of the participants and not those of Bank of Montreal, its affiliates or subsidiaries.

Whitney McWade: Hello. My name is Whitney McWade, and I'm a senior advisor within a sustainability group at BMO. In recent years, we've seen a shift in the banking sector and amongst other corporates towards a focus on achieving positive societal impact. Recent episodes of the "Sustainability Leaders" podcast have covered topics like sustainable finance, stakeholder capitalism, purpose and others, all of which point to an accelerating trend where companies are moving towards a more sophisticated understanding of the positive and negative impacts their businesses have or can have on the big sustainability-related challenges we face. The Sustainable Development Goals provide a useful framework for business to think about these impacts. We know that alongside the public sector, success of the SDGs hinges on successfully channeling business and finance towards positive economic, environmental and social impacts. Today, I'll be facilitating a dialogue on this notion of an impact-based economy and positive impact finance with Careen Abb from the United Nations Environment Programme Finance Initiative, or UNEP FI, a partnership with a global network of over 300 banks, insurance companies and investors. Careen leads the Positive Impact Initiative, or PII, a think-and-do tank at the UN which aims to catalyze the finance sector's ability to finance sustainable development in the transition to an impact-based economy for the achievement of the SDGs. With the PII, Careen has coauthored "Rethinking Impacts to Finance the SDGs," a seminal paper which sets out the PII's unique theory of impact. She led the development of the Principles for Positive Impact Finance, which set out a new holistic approach to impact management. Careen has since been driving the development of implementation tools for holistic impact analysis, including the PII's impact analysis tools released in 2020. This focus built on 10 years at the UNEP FI. During this time, Careen helped develop and expand the sustainable finance agenda in emerging markets by supporting the development of strong in-country sustainable finance networks and the creation of a well-established training program on environmental and social risk management and coauthoring the UNEP FI Guide to Banking & Sustainability. Careen, thanks so much for speaking with us today.

Careen Abb: Thank you for having me.

Whitney McWade: To kick things off, can you please tell us about the UNEP FI, who the UNEP FI works with, the type of work that you're focused on and, more importantly, how you got into this line of work?

Careen Abb: Thank you. The United Nations Environment Programme is effectively the United Nations' specific program and organization that deals with environmental issues. The UNEP Finance Initiative is a partnership between UNEP and the global network of about 300 financial institutions. We're working with banks, insurance companies, and asset managers. The purpose of our work is to mainstream sustainability considerations, environmental, social, and economic, into the decision-making processes and strategic thinking of these financial institutions. UNEP FI is perhaps the oldest sustainable finance initiative with 25 years of track record in this field.

Whitney McWade: Fantastic. So at the UNEP FI, you lead the Positive Impact Initiative. Can you tell us a little bit about this initiative and what led to its creation?

Careen Abb: The Positive Impact Initiative is a little bit of a research-and-development space within UNEP FI where we're focusing specifically on how impact analysis, impact management can be brought into mainstream business and finance. It was created specifically with the aim to tackle the SDG financing gap. It came out of a realization that really a lot of work in the sustainable finance field is either focused on risk management or on financing things that are fairly ring-fenced in terms of positive impacts but are, again, a slightly smaller part of the overall economy. We felt that a new approach was needed if we really wanted to bridge the gap and shift all of the trillions that are needed to achieve the SDGs.

Whitney McWade: So toward that goal of bridging the financing gap for the SDGs, the Positive Impact Manifesto was released in 2015. What was the purpose of that manifesto, and how has it evolved since then?

Careen Abb: The manifesto is quite important because it really set the foundation for the new approach that we felt that was needed. Perhaps most importantly, what it did is, it positioned the idea that the SDG financing gap is, first and foremost, a business-model gap. Effectively, what we mean by that is that the SDG financing gap is, in fact, the reflection of the fact that impacts today are externalities. A number of the positive impacts that we would like to have and that we still have not entirely achieved or the negative impacts that we're trying to bring under control, a lot of those things are effectively externalities, which means that they're not an integral part of the business model. They're not what is driving financial and economic value creation. Most importantly, what the Positive Impact Manifesto suggested is that this need not be the case, that there may be another way and that, in fact, impacts and, in particular, the achievement of positive impact and the reduction of negative impacts could be drivers of financial value creator. So the manifesto basically was an invitation for us to completely rethink impact, and since then, you know, what started with a positioning has evolved into a fairly unique theory of impact whereby we consider impacts and therefore impact analysis, impact management as central to business strategy as much as it is to achieving the SDGs.

Whitney McWade: And what role do you think there is for the private sector and, more specifically, the finance sector to play in achieving positive impacts like those outlined by the SDGs?

Careen Abb: Well, the private sector's role at large is to deliver products and services that ultimately will help meet people's needs and to do so in a way that's sustainable, i.e., you know, that it can continue to do so in the future, which means concrete that this needs to be within planetary boundaries. If we look more specifically at the finance sector, I think in many ways it's a continuation of, you know, one of its main roles in the economy overall, which is to be a facilitator and an enabler. By understanding the impact status, the impact possibilities of their clients and their investing companies, banks and investors can work with these to really improve their current situation and also evolve their business models so think there's really a facilitation and an enabling role, almost a co-creation role that needs to settle in and to reconnect with that primary function of the finance sector.

Whitney McWade: Mm-hmm. You mentioned this business-model gap. Can you describe what you mean by positive-impact business and therefore positive-impact finance related to that?

Careen Abb: So when we speak of positive-impact finance at the PII, what we're getting at is, effectively, business that will contribute to one or several of what is often termed, you know, the Three Pillars of Sustainable Development, so environmental, economic and social, provided that any negative impacts to those same three pillars have been duly identified and managed, so effectively what we're saying is that positive-impact finance is finance that supports that kind of business, so it's delivering positive impacts but also acknowledging that, you know, you cannot really speak of positive impacts without also taking into consideration negative impacts, that they do not cancel each other out, basically.

Whitney McWade: Mm-hmm. In the intro, we mentioned that you delivered the Principles for Positive Impact Finance. Can you summarize those principles for us?

Careen Abb: Sure. Actually, the first principle is the definition of positive-impact business and finance as mentioned just now where we look at some, you know, the three pillars of sustainable development and, as mentioned, consider both the positive and the negative ingredients and, as said, do not speak of positive-impact business or finance until we have a comfort level around negative impacts being managed. There are three more principles, which are more about, you know, enacting that general definition. Principle two is basically acknowledging the fact that methodologies, processes, workflows within, you know, financial institutions, strategy development within corporates will need to evolve so as to really mainstream and systematize much more impact analysis and that this impact analysis is going to be of a very specific kind. It's going to be holistic because we're looking at the three dimensions of sustainable development and holistic because we're going to be looking at positive and negative, and so that is, you know, effectively what principle two sets out. It's the kind of translation into practice, you know, what it means concretely for financial institutions. Principle three is effectively very clear positioning around the need for transparency, and what's very important about principle three is the fact that we consider the need for transparency on two levels. Its transparency not only about the impacts that are achieved transparency, also about processes and methodologies for impact analysis. How does one actually arrive at, you know, the conclusion that one has had a positive impact or that negative impacts have been indeed mitigated, compensated or avoided, and so there's an important transparency request at that level. The fourth principle is about assessment. It really sets out a number of ideas in terms of, how would one then qualify or benchmark or rate finance or business that indeed is positive impact? How would one, you know, say that one was delivering more positive impact or addressing more negative impacts than the other? And so it sets out some of the parameters for that obviously around, you know, the volume, the diversity of those impacts but also around things such as considering, well, is there something in the way that this particular business model, this particular financing has been set up that has enabled us to save on public spending, for instance? It's no secret that very scarce public financial resources, and that has of course only been made more acute with the COVID crisis, and so public money needs to be optimized, needs to be spent wisely, and so if, you know, private sector is able to deliver positive impacts that makes, you know, enables savings on the public side and to, you know, make sure that money can be channeled where there are no private-sector solutions, then that's a really important component as well.

Whitney McWade: Sounds like a useful framework. So how do those principles come to be? And I'm interested to know also what the relationship is between those principles and the other industry-based principles established by the UNEP FI like the Principles for Responsible Investment, Principles for Sustainable Insurance and the most recently relaunched Principles for Responsible Banking?

Careen Abb: For sure. The principles were really developed as a first step of the Positive Impact Initiative following the manifesto, the initial positioning. It was a first step in enacting the PII's unique theory of impact. If impact is really to be, you know, a source of financial value, if it's to come in the center really of business models and strategic business thinking, then it stood to reason that there needed to be general principles around how this is enacted, so a definition and indeed high-level guidance on how this is driven inside financial institutions and across business. In terms of how this relates to other frameworks and principles, this is a really important point. The level at which the PI principles establish them is almost a bit of a Meta framework. It's on a very high level just producing a definition of positive-impact finance and acknowledging, as said, the need for transparency, the need for, you know, dedicated frameworks, et cetera. As such, it's something that is overarching, so whether we're talking about a bank, an investor, you know, an insurance company, whether, you know, we're looking at certain types of financial products, such as bonds or more talking about loans or, you know, funds, these are, you know, high-level principles that really cut across, and what's quite interesting is that, you know, as we go deeper into the implementation of, you know, this thinking around holistic impact analysis and holistic impact management, the way we then embed that into more specific frameworks that are focused on one part of the industry such as the Principles for Responsible Banking or the PRI or others, we're able to flesh that out further. A good example is actually with the PRB where, among the requirements that have been instated is that of making an overall impact analysis of the banks so that impact targets might be set and that those targets be set in the areas that matter most where those impacts will actually be significant relative to what the bank is actually doing in terms of, you know, the sectors and activities it's involved in, in terms of the geographies that it's doing its business in, and so there's actually a very good complementarity between the two.

Whitney McWade: So sounds like the Principles for Positive Impact Finance are ... You could think of it as like an umbrella framework applicable to any type of financial institution.

Careen Abb: Exactly.

Whitney McWade: And so are those principles meant specifically for companies in the finance space, or is there opportunity for them to be applied to the economy more broadly?

Careen Abb: There is opportunity for them to be applied more broadly than the finance sector. That's why, in principle one, we have a definition that speaks of business, not just finance, because these same, you know, the same overarching idea persists of understanding positive impacts, driving positive impacts, managing negative impacts and, you know, taking a holistic view that will enable us to understand effectively the interactions and the interconnections between different impact areas, so rather than taking climate change, biodiversity, gender, employment, you name it, in isolation, being able to look at all these issues together and to start to understand the interconnections is a key part of what can help companies basically think about how they might evolve their business models and actually deliver a number of positive impacts that they might not have seen that they were ideally positioned to deliver, you know, effectively unpack new business opportunities, so it's very much a framework that is also meant to bring together and integrate a little bit more the overall investment chain rather than having, you know, frameworks that would work just for corporates or just for financial institutions to have something that can also bring the two together.

Whitney McWade: So we've heard of the PII, and the principles specifically take a very holistic view of sustainability issues and impacts and the importance of considering both positive and negative impacts. Now even the most positively impactful economic activities could have some unintended negative consequences or vice versa. Can you unpack that a little bit for us? How should we be thinking about how positive and negative impacts weigh against each other or counteract each other?

Careen Abb: I think it's exactly how you've just mentioned it, which is that all activities, all human activity and hence all economic activity contains within itself both positive and negative impacts. No activity will be 100 percent positive or negative. There will always be a mix of the two, and so here really it's acknowledging this and hence taking the time as it were to understand both the positive and the negative impacts, and the idea is that negative impacts can be managed. They can be avoided. They can be mitigated. They can be compensated, and that is what would be effectively required. So, you know, if we take an example of something that, you know, typically will tend to be perceived as a positive-impact activity, which is obviously a key area of focus when it comes to positive-impact finance as well, if we take renewables, solar energy, if we take wind or other such renewables, undoubtedly, there are many positive impacts from the point of view of mitigating climate risk. We know of course that there are other negative impact associations that might also occur. If we take wind, for instance, obviously the question of bird migrations needs to be taken into account, noise disturbances, et cetera. So whatever the sector or the activity, there will always be a mix of both, and I think what's really important in this approach is to say, you know, it's not a question of net impact. It's not a question of saying, "Well, I have, you know, this much positive and this much negative, seems to be more positive than negative or, you know, so I can kind of cancel the two out." It's about saying, "Well, here's the positive, and I'm trying to drive that. Here are some negatives. What do I do about that? How do I avoid them, compensate them or mitigate them and not leave that space uncovered?"

Whitney McWade: So addressing them both simultaneously rather than trying to manage this balancing act?

Careen Abb: That's correct.

Whitney McWade: So this unique perspective of impact was outlined in a 2018 position paper called "Rethinking Impact to Finance the SDGs," which you helped write. That paper suggests that the quest for positive societal impacts and financial goals are not in contradiction and can be pursued simultaneously as win-win outcomes. Can you explain this concept of an impact-based economy for us?

Careen Abb: Yes. This goes back to this very initial positioning of the Positive Impact Manifesto where we were calling into question the notion that driving positive impact or reducing negative impacts could only be addressed as externalities. Effectively, you know, what we mean by an impact-based economy is that we believe that there are business models that can be driven by positive impact where effectively what that means is that the more positive impacts are delivered or the more negative impacts are avoided, the more revenue there basically is, and so hence, you know, the delivery of positive impacts and the reduction of negative impacts is part and parcel of the business proposition. It becomes, you know, the purpose of that business activity because that is what will generate revenues. It's important to note, however, that in talking about the transition to an impact-based economy, we're not suggesting that all business models would be like that. What we're suggesting is that we need to think about the whole of the economy in terms of where such business models and where effectively impact value chains can be identified and materialized so that we make that progress effectively in closing the SDG financing gap, acknowledging that it's not something that we can leave just to public finance. We need to find private finance solutions, and unless there are business models like this, then the scale of finance that we'll be able to mobilize, it will not be sufficient if the only levers we have is either to be constrained through regulation to go into, you know, business models that are either too risky or not producing sufficient revenue, you know, or if we also rely simply on accepting to take more risk and accepting less revenue, but that will not be sufficient and hence that, you know, we do have an opportunity to unveil and uncover a number of these impact-based business models, and we need to think of the whole of the economy and where those possibilities lie even if individually each business model may not work like that.

Whitney McWade: So now that we've set the context and have a good understanding of what we're talking about when we are talking about positive-impact business, positive-impact finance and impact-based economy, let's shift to some of the tools and methodologies to help companies move along this impact journey from not really considering impacts at all towards this holistic consideration of impacts. What's available to us to identify and monitor impacts?

Careen Abb: You're quite right. Everything is an implementation, and so having a theory and a set of principles is certainly not sufficient and being part of what we've been trying to do with the Positive Impact Initiative to provide, you know, some more concrete tools, and there's effectively three at this point. The first one is what we've termed impact radar that tries to unpack a little bit more what we mean when we say we want to be holistic and understand the Three Pillars of Sustainable Development. That's still quite high-level, so the impact radar, you know, goes deeper into understanding, well, what are the impacts areas that we might need to look at? The second tool or set of tools are a set of model frameworks that basically give a high-level description of what holistic impact analysis and management can mean for different types of business or assets, so the model frameworks at the moment are on corporates, on projects as in project finance and real estate, and then finally, and I guess perhaps the most in-depth tool or most hands-on tool are the impact-analysis tools that were recently released, so there is an impact-analysis tool for banking portfolios so that banks can self-assess, effectively, where their most significant impact areas are, and there is a corporate impact analysis whereby financial institutions can understand the PI status and possibilities of their clients or investee companies, which can also be used by corporates directly in more of a self-assessment mode.

Whitney McWade: Okay, so let's dive into each of those three things in turn starting with the impact radar. Can you describe to us in a little bit more detail what the impact radar is and how it was developed?

Careen Abb: Yeah, so the impact radar is effectively a review of what the main impact themes or impact topics are that we might need to look at if we want to pursue a holistic impact analysis. If we're trying to understand simultaneously the environmental, the social and the economic dimensions of sustainability, what specifically does that translate into in terms of impact areas, per se? And so the impact radar, effectively, you can think of as a wheel that contains 22 impact areas, some of them environmental, some of them social and some of them economic, all of which are defined based on international standards and definitions. The way this was developed was through as much of the PII materials, through an iterative process with a number of members of UNEP FI and external stakeholders, as said, basing ourselves very much on existing international standards.

Whitney McWade: So we know that achieving progress towards the SDGs is the fundamental and ultimate goal of the Positive Impact Initiative. There are 17 SDGs, and you mentioned there are 22 impact categories in the impact radar, so how do the impact categories in the radar interact with the SDGs? What's the connection there?

Careen Abb: That's a very important connection actually between the two because indeed the whole of the initiative is very much focused on the SDGs and the financing gap. In setting up the radar, our starting point was actually to look at the SDGs. What we found is that in putting up a radar is that the intention was, of course, that we would want this radar to be something that could be woven into analyses, workflows and methodologies in a way that could be basically compatible for business, first of all, and that would be, you know, very, very clear basically what different impact areas whereabouts, and so in terms of the SDGs, what you will find, you know, when you kind of review them one by one is that some indeed can be described as impact areas, so climate is an obvious one. Food is an obvious one. Health is an obvious one. Other SDGs can perhaps more accurately be described as systems, and so sustainable cities is an example of that whereas really what we're trying to describe as an impact area per se, so within a sustainable city, there are, of course, many different impact areas that, in fact, underpin that, such as mobility, housing would come back into that. There are many factors that are linked into that, and so we wanted to make sure that, you know, for the purposes of a practical analysis, we could have something that did not work, I guess, on several levels at once, so that is effectively, you know, the reason for a slightly different number. The other thing is that we also felt that, you know, if we were trying to be holistic, and in the impact radar, you know, as we looked at different standards. We obviously also looked at human-rights issues, and we found that certain items that have perhaps more to do with culture and leisure were not terribly evident in the 17 SDGs and yet obviously are part of, you know, a broader set of very real needs of populations as well, and so those are the kinds of things that we also wanted to make sure that we could adequately capture.

Whitney McWade: So if a company or a financial institution identifies impacts according to the impact radar and makes progress on those impacts that will result in advancement towards achieving one or more of the SDGs?

Careen Abb: Absolutely, and it's quite feasible to map from the impact areas to the SDGs and is something that has been done as part of the resources within the impact analysis tools that we were referring to earlier.

Whitney McWade: Excellent. So you mentioned that the PII has also published three model frameworks to provide guidance on integrating impact into business processes and decision-making. Who are those frameworks intended for, and what roles are they expected to play?

Careen Abb: The model frameworks are intended to act effectively as a complement to the radar. The radar just gives you the impact areas and definitions of impact areas. Obviously there is then a need to have a process whereby impact analysis takes place as per principle two effectively, so where the radar kind of fleshed a little bit more out, you know, the three pillars that are referred to in principle one, the model frameworks was a first step forward in further unpacking what we were saying in principle two in terms of adjusting processes, adjusting methodologies to implement holistic impact analysis, and so these model frameworks really are made for two audiences, on the one hand, financial institutions, of course, but also, they were intended for third parties who might be called on by financial institutions or businesses to either give a second opinion on whether indeed, you know, a holistic impact analysis had been undertaken and hence that, you know, a given transaction or a given product was in line with what is said in the Principles for Positive Impact Finance or similarly third parties, you know, being called on for verification or certification purposes, not something that UNEP FI delivers directly but certainly something that institutions, you know, sometimes require and would look for and would, you know, also do as part of an attempt to comply with this idea of transparency that we have under principle three, so the model frameworks really are intended to speak to both of those audiences at a fairly high level so kind of outlining, you know, what the main steps are of holistic impact analysis in three different situations, so firstly, for corporate finance with unspecified use of proceeds, secondly for project finance and then thirdly for real-estate investments.

Whitney McWade: So you mentioned this idea of impact analysis a few times. Let's dive into the tools that are available to us to conduct impact analysis. After about a year of work, the UNEP FI and the Positive Impact Working Group launched two tools in April of this year. We have the Corporate Impact Analysis Tool for banks and investors to understand their clients' impact status or potential for impact and the Portfolio Impact Analysis Tool, which is meant for banks to analyze the impacts of their lending portfolios. Can you tell us about the process that was undertaken to develop those tools?

Careen Abb: Absolutely, so both processes involved working groups with UNEP FI members and a number of stakeholders, but maybe to start with the Corporate Analysis Tool, that is a tool that we derived with a working group that initially was intent on trying to take the impact radar and the model framework aimed at corporate finance with unspecified use of proceeds and applying them, and what we found quite rapidly with, you know, this working group of banks, investors and third parties is that the model frameworks, you know, gave, indeed, the overall steps, and the impact radar provided a good review of the different impact areas that one needed to look at, but working-group members were struggling to kind of build from processes, methodologies that they already have to integrate this, that there really was quite a big step effectively from what was currently being done to something as holistic as this, and so after a few months, the working group did decide to actually try and construct a methodology to go beyond effectively the outline and the raw materials of the impact radar to a tool that could be taken off the shelf as it were to perform an impact analysis or indeed adapted to internal systems, et cetera, but that would, you know, spell out the process more clearly and apply effectively the impact radar and operationalize it a step further, so that was the Corporate Impact Analysis Tool process. For the banking tool, slightly different. We were referring earlier on to the Principles for Responsible Banking that were released last year, and as mentioned, with, I guess, the track record already that UNEP FI had on thinking about impact and trying to really take this further, the PRB integrated among its requirements this need for a review of the bank's portfolio in terms of, you know, the most significant impact areas so that it could set targets vis-????????-vis those impact areas, and so from the outset, it was decided that it would be important to effectively have a methodology, a tool that would facilitate this building on also, you know, the positive-impact work effectively, take a holistic approach to this, and so after, you know, some initial kind of reviewing again of, you know, current approaches to trying to map impacts across bank portfolios where a lot of experience with materiality analyses, with, I guess, SDG mappings, that was felt to be, you know, slightly different to what we were doing with the Positive Impact Initiative and also where the PRB were trying to go where we really wanted to have a very, you know, grounded approach to managing impact really based on, you know, the reality of the bank's portfolios, what kind of portfolios, what kinds of clients and what types of sectors and activities and what countries that have what needs, and so, you know, eventually that became the tools that were released earlier this year.

Whitney McWade: And how are the two tools the same, and in what ways do they differ?

Careen Abb: So they're the same in that both of them are applying our holistic approach to impact analysis and management where we're looking at all three pillars and looking at positive and negative. If we take that then one level down in terms of practical aspects, it means that both tools are constructed with the impact areas that were identified under the impact radar, and then the workflows have many things in common as well. They also both draw from a number of in-built resources that were developed around the impact radar where we've mapped out, effectively, different sectors, different business types, different portfolios and client types to all of the impact areas. That's, you know, what they have in common. The difference is, of course, I guess, the direction of travel in a way. The portfolio tool for banks is a top-down analysis. It's looking at bank-wide portfolios, whether that's consumer banking, whether that's corporate banking, business banking and really trying to get a sense of, you know, what the whole of the bank's impact are in terms of, you know, where its business is happening whereas the corporate analysis tool is more of a bottom-up analysis where we're looking at client by client effectively, and so at some point of course, the two also necessarily meet whereby as one out of the, you know, portfolio analysis starts to hone in on what the most significant impact areas are, one also starts to understand, well, what are the, you know, the key sectors, and within those key sectors, what are maybe the key companies that we need to engage with if we indeed want to establish certain impact targets and meet those targets? You know, at that point, one can use the corporate tool effectively to go deeper and to analyze a series of companies and to engage with them.

Whitney McWade: So the foundations of the tools are the same so that the inputs of both tools could be understood by a use of either?

Careen Abb: Absolutely.

Whitney McWade: So we've seen a huge increase over the last couple years in interest and activity around sustainable finance. Is there a use case that you envisioned for the tools in relation to sustainable finance either identifying sustainable finance opportunities for a bank or helping a bank track their sustainable finance activity?

Careen Abb: Yes, absolutely on both accounts. First of all, again, because of this very holistic approach, if we take, for instance, you know, the bank portfolio tool, it's a process that basically leads users to taking a 360-degree view of the bank as well as doing that through a 360-degree review of impact areas across environmental, social and economic, and, you know, doing that basically starts to really pinpoint where there might be, you know, opportunities or a possibility of doing more effectively. Likewise, with the corporate tool, by doing a holistic review of the corporate in terms of all the different impact areas, positive and negative, that starts to, you know, bring to light effectively where the corporate actually has, you know, some strengths by virtue of its expertise, by virtue of its client base that could actually be harnessed to an impact area that, you know, they had not considered or are underexploiting as it were, so it is very much a resource that is meant to, you know, be action-oriented and business-driven. Again, this is, you know, this is the very foundation of the PII approach is to, you know, try to really capture the fact that there is a direct business association and a value-creation opportunity in impact, per se. And in terms of, you know, tracking sustainable finance activity within the bank, likewise I think the tools set up a framework and a data architecture that can be repeated over time, so the scope can be increased over time. That, you know, is also a great way for financial institutions to, you know, see over time how their significant impacts are evolving and how their performance is evolving in those areas.

Whitney McWade: Great. So in terms of actually using the tools, are there any limitations or challenges that you foresee users may face?

Careen Abb: Well, one thing to say in terms of both tools is that, you know, users up to now do recognize that there is a jump from what, you know, may currently be practiced and this approach and this methodology where we are indeed taking a holistic approach and where we're looking at all impact areas at once and positive and negative at once, and so that is, I guess, at the outset something that may seem daunting. Having said that, once one gets into the flow, one realizes that, you know, there are many parts of the tool that are actually either resources or either outputs, and the areas that require input are very, very specific. Now, in terms of limitations specifically, I think it's worth noting on the bank portfolio tool that not all bank portfolios are completely covered as yet. At the moment, consumer banking, business banking, corporate banking and investment banking are covered, but that does not include capital-markets activities so anything that has to do with secondary markets, and likewise private banking is not covered as well as asset-management activities. We focused, I guess, on what can be seen as, you know, the core of the core of what, you know, most banks in most places do and that takes up the bigger part of their portfolios, and that is, you know, something that actually we'll be working on going forward.

Whitney McWade: I look forward to seeing what those enhancements have in store. So, Careen, to wrap up, I have a couple questions for you to try and help connect this great initiative to some of the bigger trends that we're seeing in the sustainability space, and the first one is this idea of a stakeholder-based model of capitalism, which we're seeing come to life with more companies coming out with purpose-aligned business models. The World Economic Forum released a new Davos Manifesto ahead of the 2020 meeting, which really reinforced its view that the role of companies is to engage all stakeholders in shared value creation. How do you see the work of the Positive Impact Initiative supporting or interacting with this trend?

Careen Abb: Going back to, you know, the first things we were saying when we were talking about the Positive Impact Manifesto, it's about understanding that it's a structural issue that we have here. It's not, you know, a purely financial issue. It's about, you know, business models and the structure of the economy, and indeed, you know, thinking again back to what the role of the economy and what the role of business is, and it is effectively to deliver solutions that enable human beings basically to address their needs, and so I think what we're going to see is, you know, where rather than having a purely sectoral logic, we start to have more of a functional logic, right? And that's what we mean by effectively an impact-based economy as well, so I think the works that we're pursuing here is very much part and parcel of that trend where it's back down to, you know the end beneficiaries. It's back down to those stakeholders except that, you know, I think what we're keen to do in the Positive Impact Initiative is to take as rigorous and systematic and scientific an approach to this as we possibly can. Working for stakeholders is not something that is done, you know, we think, just through stakeholder engagement. It's something that is done by, you know, thinking in terms of impacts from the start, and so, you know, by looking at all these different impact areas, effectively what we're looking at is, you know, what, I guess, you know, we already know through international standards such as, you know, human rights, the SDGs are the basic needs and the core needs of people and the planetary boundaries in which we are, so I think that's, you know, the one thing that we really hope to be able to bring to this broader trend.

Whitney McWade: Mm-hmm. In closing, let's explore that a little bit. Through this pandemic, we've seen rapid and dramatic impacts on the economy, and I'd say arguably greater attention now is being placed on a company's social impacts as it relates to well-being of their employees and other stakeholders like customers, suppliers and local communities. How do you think that the current crisis will impact the trajectory of the impact-based economy that the PII envisions?

Careen Abb: I think it will accelerate it. There are two important things that are happening. First, we're seeing that different impact areas are related even if we don't see their connections. We start to see that, you know, we cannot focus just on one. You were talking about social impacts and the realization that there's a whole series of social impacts that really need to be considered, and we know that, you know, the urgency of addressing climate change has not disappeared, so I think, you know, that's one key thing that's being shown to us, and if anything, that reinforces the notion that we need a holistic approach. We need something that enables us to think about all of these issues together. The other thing, you know, that obviously this pandemic is creating is very strong financial stress at many levels from individuals to companies to governments, and so I think that is, you know, the kind of pressure that can, you know, further accelerate the relevance of a holistic approach to impact because effectively what you're doing when you start to undertake an impact-based review of a client or of the economy and you start to see those interconnections, what you're going to be able to do out of that is very, very simply is to reduce the cost-to-impact ratio. If we're not meeting the SDG financing gap because today under current business models they're too expense, right? It's either too risky, or there's not enough returns, which is another way of saying it's too expensive because there's also not enough public money to cover them, and so what that means in economic terms is, we need to reduce the cost-to-impact ratio. We need to bring this into business models, and with the level of financial stress that we're currently under, I think all the incentives and the need is there to really dig deeper into this and to really make the most out of this. Arguably, you know, in many ways, this is something of course that many, you know, developing countries have been living with for many, many years and decades, and now unfortunately with, you know, the COVID crisis, it's a reality that most if not all countries are now facing, and so I think this is something that really should accelerate, and I think the onus is on us to, you know, to go faster effectively to show how this approach can really deliver solutions.

Whitney McWade: Absolutely. Lots of really important work ahead of us but lots of opportunities that come with that as well. Careem, thank you so much for joining us today and sharing your knowledge and expertise on this fascinating and important topic. We at BMO look forward to continuing to work with you and with UNEP FI on its initiative in the coming years.

Careen Abb: Thank you very much for the opportunity to talk about our work, and we look forward to working with BMO as well over the next months and years.

Michael Torrance: Thanks for listening to "Sustainability Leaders." This podcast is presented by BMO Financial Group. To access all the resources we discussed in today's episode and to see our other podcast, visit us at bmo.com/sustainabilityleaders. You can listen and subscribe free to our show on Apple Podcasts or your favorite podcast provider, and we'll greatly appreciate a rating and review and any feedback that you might have. Our show and resources are produced with support from BMO's marketing team and Puddle Creative. Until next time, I'm Michael Torrance. Have a great week.

Disclaimer: The views expressed here are those of the participants and not those of Bank of Montreal, its affiliates or subsidiaries. This is not intended to serve as a complete analysis of every material fact regarding any company, industry, strategy or security. This presentation may contain forward-looking statements. Investments are cautioned not to place undue reliance on such statements as actual results could vary. This presentation is for general information purposes only and does not constitute investment, legal or tax advice and is not intended as an endorsement of any specific investment product or service. Individual investors should consult with an investment, tax and/or legal professional about their personal situation. Past performance is not indicative of future results.

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Whitney McWade Senior Advisor, Sustainability Strategy, Disclosure and Impact Measurement



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