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Impact Investment needs global standards and better measurement

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Social impact investment, which aims to improve well-being as well as earn a financial return, could be more effective if it were more clearly defined internationally with more measurable outcomes, according to a new OECD report.

Social Impact Investment: The Impact Imperative for Sustainable Development calls for international standards to be applied on collecting data and measuring impact. Currently, most impact investment goes to areas with relatively easy returns, such as financial services, energy and housing as perceptions persist of a trade-off between social and financial returns.

The OECD has proposed defining social impact investing as targeting core development, social and environmental areas that help people and countries most in need in underserved or developing regions, and stipulating that the primary focus should be on delivering measurable impact. No such definition is being universally applied, however, and there is little rigour in setting boundaries on what should count as impact investment and a lack of internationally comparable data and evaluation tools.

“The challenge lies in defining and measuring impact,” said OECD Development Co-operation Director Jorge Moreira da Silva. “Different countries, public and private organisations are using different yardsticks to measure different elements. To counter the risk of ‘impact washing’, public authorities have a responsibility to set standards and ensure they are adhered to.”

The number of social impact investment funds has quadrupled in two decades to over 200 funds with USD 228 billion invested, more than half of that in emerging markets, according to the Global Impact Investing Network. The phenomenon is spreading to mainstream investment funds as wealthy investors and philanthropists increasingly want their money to also have a positive social or environmental impact.

Impact investing is proving to be key for channelling new resources – primarily funding but also innovation, accountability and sustainability – towards the UN Sustainable Development Goals. For example, a GBP 10 million bond that funded a UK non-profit, Golden Lanes Housing, that has provided adapted housing and related services for around 1,500 people with learning disabilities was also able to return 4% interest to investors. In the developing world, investment firm Sarona Asset Management provides growth capital to small businesses in developing countries and frontier markets including Egypt, India, Nigeria and Tunisia.

The OECD report says 45 countries have adopted public instruments related to impact investing, with the European Union, United Kingdom, Malaysia and France leading the way, and 20 have adopted a legal definition for social enterprises.

It says governments should now do more to improve fiscal and regulatory incentives for impact investing and put in place the necessary legal structures for the market to function well. This could include updating financial and fiscal regulation, establishing reporting standards, and increasing flexibility into corporate legislation so that rather than having to identify as being a for-profit or a non-profit, companies can be hybrids.

Improved standards for social impact investment funds should lead to more effective impact investment by mainstream funds.

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Global economy projected to show fastest growth in 50 years

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The global economy is expected to bounce back this year with growth of 5.3 per cent, the fastest in nearly five decades, according to the UN Conference on Trade and Development (UNCTAD).

In its new report released on Wednesday, the agency said that the rebound was highly uneven along regional, sectoral and income lines, however.  

During 2022, UNCTAD expects global growth to slow to 3.6 per cent, leaving world income levels trailing some 3.7 per cent below the pre-pandemic trend line. 

The report also warns that growth deceleration could be bigger than expected, if policymakers lose their nerve or answer what it regards as misguided calls for a return to deregulation and austerity. 

Differences in growth 

The report says that, while the response saw an end to public spending constraints in many developed countries, international rules and practices have locked developing countries into pre-pandemic responses, and a semi-permanent state of economic stress. 

Many countries in the South have been hit much harder than during the global financial crisis. With a heavy debt burden, they also have less room for maneuvering their way out through public spending. 

Lack of monetary autonomy and access to vaccines are also holding many developing economies back, widening the gulf with advanced economies and threatening to usher in another “lost decade”. 

“These widening gaps, both domestic and international, are a reminder that underlying conditions, if left in place, will make resilience and growth luxuries enjoyed by fewer and fewer privileged people,” said Rebeca Grynspan, the secretary-general of UNCTAD. 

“Without bolder policies that reflect reinvigorated multilateralism, the post-pandemic recovery will lack equity, and fail to meet the challenges of our time.” 

Lessons of the pandemic 

UNCTAD includes several proposals in the report that are drawn from the lessons of the pandemic. 

They include concerted debt relief and even cancellation in some cases, a reassessment of fiscal policy, greater policy coordination and strong support for developing countries in vaccine deployment. 

Even without significant setbacks, global output will only resume its 2016-19 trend by 2030. But even before COVID-19, the income growth trend was unsatisfactory, says UNCTAD. Average annual global growth in the decade after the global financial crisis was the slowest since 1945. 

Despite a decade of massive monetary injections from leading central banks, since the 2008-9 crash, inflation targets have been missed. Even with the current strong recovery in advanced economies, there is no sign of a sustained rise in prices. 

After decades of a declining wage share, real wages in advanced countries need to rise well above productivity for a long time before a better balance between wages and profits is achieved again, according to the trade and development body’s analysis. 

Food prices and global trade 

Despite current trends on inflation, UNCTAD believes the rise in food prices could pose a serious threat to vulnerable populations in the South, already financially weakened by the health crisis. 

Globally, international trade in goods and services has recovered, after a drop of 5.6 per cent in 2020. The downturn proved less severe than had been anticipated, as trade flows in the latter part of 2020 rebounded almost as strongly as they had fallen earlier. 

The report’s modelling projections point to real growth of global trade in goods and services of 9.5 per cent in 2021. Still, the consequences of the crisis will continue to weigh on the trade performance in the years ahead. 

For director of UNCTAD’s globalization and development strategies division, Richard Kozul-Wright, “the pandemic has created an opportunity to rethink the core principles of international economic governance, a chance that was missed after the global financial crisis.” 

“In less than a year, wide-ranging US policy initiatives in the United States have begun to effect concrete change in the case of infrastructure spending and expanded social protection, financed through more progressive taxation. The next logical step is to take this approach to the multilateral level.” 

The report highlights a “possibility of a renewal of multilateralism”, pointing to the United States support of a new special drawing rights (SDR) allocation, global minimum corporate taxation, and a waiver of vaccine-related intellectual property rights.  

UNCTAD warns, though, that these proposals “will need much stronger backing from other advanced economies and the inclusion of developing country voices if the world is to tackle the excesses of hyperglobalization and the deepening environmental crisis in a timely manner.” 

For the UN agency, the biggest risk for the global economy is that “a rebound in the North will divert attention from long-needed reforms without which developing countries will remain in a weak and vulnerable position.”

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Italy: Pro-growth reforms and government support key to a greener and jobs-rich recovery

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The post-COVID recovery offers an exceptional opportunity for Italy to tackle long-standing obstacles to job creation and the raising of living standards, according to a new OECD report.

The OECD’s latest Economic Survey of Italy says government support for Italian households and businesses hit hard by the COVID-19 pandemic should continue until the recovery is firmly underway, but should become increasingly targeted as the economy continues to strengthen. It says that generous fiscal support has been effective in mitigating job losses and preserving productive capacity. This will help boost the short-term recovery as vaccination rates accelerate and restrictions ease. Higher public spending, including from Next Generation EU funds, will support higher investment alongside improved confidence and demand.

The National Recovery and Resilience Plan offers a unique opportunity to create a greener, more digitised and productive economy, the report adds. The government, it says, has an ambitious agenda rightly prioritising reforms to competition, to boost the efficiency of civil justice processes and to reform the public sector in order to tackle uncertainty, delays and costs that currently hamper investment. Green infrastructure and broadband investments can improve the competitiveness of Italian firms.

The report suggests that the chances of implementing this reform plan successfully are greater than on previous occasions. Clear implementation milestones and targets linked to the disbursement of Next Generation EU funds have been publicised, while recently passed laws to simplify green investments and support decision-making  will help facilitate successful implementation of the plan.

The OECD projects Italy’s economic growth to be 5.9% this year and 4.1% in 2022, following an 8.9% fall in GDP in 2020. A stronger-than-expected second quarter explains the upward revision from the 4.5% expansion forecast for 2021 in the OECD’s May Economic Outlook. 

Presenting the report alongside Italy’s Economy and Finance Minister Daniele Franco today, OECD Secretary-General Mathias Cormann said: “Italy’s National Recovery and Resilience Plan is activating stronger, greener, fairer and more digitised growth that will benefit all Italians with improved opportunities to get ahead. A more effective public sector is crucial for ensuring its success. The plan must be fully implemented and complemented with reforms to support further growth, including with more investment in green infrastructure and R&D and reforms to keep driving the effective digital transformation of the Italian economy.”

The report recommends that once the pandemic subsides, public spending and tax policy must be reformed to complement the National Recovery and Resilience Plan. Currently, pension-related expenses crowd out investment in infrastructure, education and training, penalising the young, many of whom are out of work and at risk of poverty.

Labour force participation remains particularly low for women, especially those with children. Access to quality childcare and adult skills training needs to be improved across all regions, the report says.

Compared with the OECD average, taxes on labour remain too high. The report recommends implementing comprehensive tax reform to reduce the complexity of the system and to lower labour taxes. This should be financed through improved compliance – driven by greater use of technology and card payments.

Raising the effectiveness of Italy’s public sector is more urgent than ever. The report says that fully implementing the National Recovery and Resilience Plan will help fill skills gaps in the public sector, further its digitisation and reduce regulatory barriers that inhibit civil servants’ ability to deliver.

The report welcomes the set up for the Plan’s implementation and says the administration would generally become stronger and more agile by reducing the number of existing rules, regulating the services sector and green economy with a stronger focus on outcomes, in line with the government’s priorities and that support sustained growth. The report also recommends encouraging better coordination across Italy’s multiple layers of government.

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Lao PDR: Economic Fallout from COVID-19 Deepened

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Economic fallout from the COVID-19 pandemic, and from the efforts to contain it, deepened in Lao PDR over the second quarter of 2021 as work fell off abruptly and households and businesses reported declines in income and revenue, according to the latest round of the World Bank’s Rapid Monitoring Phone Survey.

The survey, conducted in April-May this year with 2,000 randomly selected households, shows that 51% of survey respondents reported being without work or having had to stop working in April–May 2021, up from 17% in February–March 2021. In the services sector, more than half of workers in wholesale and retail trade and other services had to stop working or switch jobs during the lockdown, according to the survey.

By May 2021, 5.5% of businesses had permanently closed, while 33% were temporarily shuttered. Among businesses that remained in operation, 65% experienced a fall in revenue from pre-lockdown levels. Also in May, around 43% of households experienced a decline in household income relative to before lockdown, leading respondents to express growing concern about food insecurity for people in their communities.

This was the third round of the COVID-19 Rapid Monitoring Phone Surveys of Households in Lao PDR. The surveys are aimed at monitoring the social and economic impacts of the pandemic. The results help provide insights into the effects of the pandemic on household well-being, and feed into policy advice and analytical studies such as the latest edition of the Lao Economic Monitor. Similar surveys are being carried out in 64 countries across the world.

The first round of the Lao phone surveys was conducted in June to July 2020, when the country had just exited the initial nationwide lockdown, and the second round ran from February to March 2021, one year into the pandemic. More details are available on the World Bank’s Lao PDR website. The monitoring is part of a wider health response to the pandemic. The Bank is coordinating a $33 million COVID-19 response project in Laos, supported by various development partners under the guidance of the Ministry of Health.

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