Five ways changing finance can finance sustainable change

Since 1980, the Ashoka network has been identifying and supporting the world’s leading social entrepreneurs, launching over 3,800 enterprises in 90 countries. Learning from patterns in their innovations, it aims to build and mobilize a global changemaker community. This includes working with corporations and their stakeholders to develop actionable strategies for driving systems change at scale.

This mission aligns perfectly with the EY Ripples program’s focus on working with impact entrepreneurs, using EY professionals’ skills and experience to help scale business model innovations that purposefully drive progress toward the UN Sustainable Development Goals.  

Entrepreneurs’ perceived flaws in the current financial system include the narrow focus on short-term profit maximization, the belief that capital must only seek the highest rate of financial return, and the blurring of investment and speculation, which contribute to a vicious cycle of chasing short-term returns over long-term, sustainable impact.

They call upon investors for a shift in mindset — rebalancing priorities and expectations, focusing on investment in the real economy, and taking a more integrated view of impact, risk and return. This would inherently encourage a more positive, long-term, holistic perspective, in turn leading to deeper consideration of, and greater value being attached to, the beneficial social, cultural and environmental outcomes of any given investment.

Allied to patterns of thinking that lead to an outsized focus on maximizing short-term financial returns is the emphasis on achieving economies of scale, which, in driving out diversity and redundancy, can be hugely detrimental to systemic resilience. By contrast, a vibrant and interconnected web of locally relevant climate responses can cumulatively achieve global impact, while each individually honors the specific contours of community and place.

Entrepreneurs call upon financial institutions to prioritize the healthy circulation of capital to small and mid-sized enterprises at regional and local scale, not just to large corporations, so as to empower the diffusion of culturally relevant innovations. They also encourage greater participation of large corporations in local sustainable innovation ecosystems, as a means to achieve their own sustainability goals.

While it’s common to think in binary terms — of pure philanthropic capital at one end of the spectrum and commercial investment at the other — the reality is that multiple forms of capital are needed to support impact enterprises through different phases of their development.

While investors adopting a more long-term, holistic perspective can help to some degree, it’s only part of the equation. Another is the development of more blended financing, specifically designed to accelerate positive societal and environmental impacts. Entrepreneurs call for the development of new public-private partnerships and financial instruments that can better support them to test, iterate and scale breakthrough ideas.

Many of the entrepreneurs we spoke with see the rise of environmental, social and governance (ESG) initiatives as a positive sign that social and environmental concerns are now firmly on top of the corporate agenda. Nonetheless, considerable skepticism persists around the ability of ESG to address systemic risks and failures, and to drive the kind of deep business model transformation needed to put the world on a 1.5°C pathway.

Such skepticism isn’t limited to issues of consistency and comparability. It also includes the inward-looking nature of most ESG frameworks — i.e., predominantly concerned with how social and environmental upheaval might compromise business-as-usual, rather than how business-as-usual might compromise the health of social and environmental systems.

Entrepreneurs challenge policymakers and standard setters to transform those frameworks to take greater account of companies’ outbound impacts on people and planet. This would drive increased recognition that the health and vitality of economic, social and environmental systems are interdependent.

Entrepreneurs share the view that governments could and should be doing more to establish a better operating environment for climate innovators to flourish. This not only includes better regulation to curb undesirable behaviors and outcomes, but also stronger incentives to positively encourage the right ones.

A prime example would be reimagining tax systems, rooted in goals of stock management, rather than throughput. This would essentially involve shifting from taxation of renewable resources (including human labor) to consumption of nonrenewable materials and energy, and the production of undesired wastes and emissions. Such changes could help to promote regional circular economies over a linear global one, based on local reuse of materials, and serve to increase the value and competitiveness of material-preserving business models.