In the runup to COP28, the $800Bn carbon market has again come under serious scrutiny, as discussed in this sharp S&P Global podcast. A number of efforts, such as the Core Carbon Principles, to build confidence in the integrity of carbon claims have arisen, to ensure the entire edifice in fact drives lower greenhouse gas emissions. At the heart of these efforts is a) transparency about the basis for claims of value creation, b) quality third-party validation, and c) quality impact management practices: that is to say, sincere effort to ensure the environmental impact is real (expressed through tracking, governance, and reasonable proof that the impact wouldn't have happened but for the enterprise).
What we're seeing in carbon today is a vastly more complex and wizened version of the microfinance industry a dozen years ago, when despite the Social Performance Task Force’s quality know-how, the exuberant belief– in hindsight naive– was that microfinance was a "miracle," in the words of one well-intentioned impact investor whose work to enable microfinance organizations to access equity and debt capital to scale was widely celebrated. The predominant habit was that– all too much like in mainstream finance– microfinance required no attention to the impact of the loans on borrowers, or to the wraparound support accompanying the loans. This inevitably led to the overlooking of real negative impacts, including overindebtedness, and even multiple borrower suicides. It resulted for a time in the cratering of both the market and the capacity of microfinance lenders to do their important work.
In microfinance today we see organizations vying to be listed in the new 60 Decibels MFI Index, built from interviews of tens of thousands of borrowers about how the loans are affecting them… Excitingly, 60 Decibels also provides (paid) access to the data underlying the study, to enable analysts within or outside of financial institutions to understand performance relative to peers, and spotlight areas where harm to borrowers can be reduced and benefits– like poverty eradication– can be improved. We heard recently from Sasha Dichter that he was aware of FSPs feeling like they needed to get into the Index or be in a sense left behind.
Which brings us to the essence of a truly thriving market for those truly committed to solve social problems: peer pressure to prove you’re delivering real impact.
Hector Alejandro, CC BY 2.0 via Wikimedia Commons
This is great news! In the microfinance market we at last may be witnessing a sense of friendly but real competition between organizations to step up their impact management games. And in the carbon markets, though they are far huger and more complex, we see in our clients and beyond a powerful appetite to prove there are better ways, ways that don’t get confused about the point by big dollar signs and instead stay focused on delivering real value for the people on the front lines of humanity’s shared quest to rise above climate, economic, and health crises.
It’s taken decades of diligent work figuring out how to create positive results for customers, the courage of operators to have one’s impact on stakeholders validated directly by them to a third party, ingenious productization of appropriate solutions, and the cold hard cash to make all of that possible. So along with the scrutiny, and some troubling pitfalls along the way, there is good news: those who aim to achieve real, scalable, market-driven impact might just possibly be showing a healthy– a necessary!– bit of bravura about how it’s done.