How to score: Measuring sustainability in investment promotion

Mobilising sustainable investment is increasingly an important objective for the private and public sector alike. One of the main challenges is accurate measurement. Investment promotion agencies at the forefront of interactions with private investors illustrate how to adapt to this task. The OECD’s Monika Sztajerowska highlights recent developments in this regard and how investment promotion agencies can better score investment’s contribution to sustainable development and growth.

Investors, governments and the civil society are increasingly interested in sustainable investment. From companies’ earning calls and specific shareholder actions to country development strategies, as well as in media headlines and trends in online searches, mentions of two acronyms – sustainable development goals (SDGs) and environmental, social, and governance (ESG) – are everywhere. Research shows that, on average, investors are willing to pay a 20 basis points premium to invest in funds with an ESG mandate. Non-governmental bodies and regulators have responded to this demand, including with new rules on non-financial reporting. Investment promotion policies and the agencies that interact with investors will also need to adapt.   

New expectations and regulation create a challenge: how to translate these goals into meaningful, comparable and data-based metrics?

Investor surveys show that adequate measurement and disclosure is a key challenge in supporting ESG investments, yet few firms report meaningful indicators. In general, businesses of different types and sizes are and will be affected in different ways and can adopt different strategies. The challenge is also no less trivial for public bodies. Many OECD studies show the gap between what is desirable and what is measured, providing recommendations for financial-markets institutions on ESG investments and the whole spectrum of state bodies on overall SDG tracking. With time, more state actors will be required to respond to the sustainability imperative.

Investment promotion agencies (IPAs) are an illustrative example. Traditionally mandated to attract foreign direct investment, they are being tasked by governments to respond to a wider set of public policy objectives and to attract more investment that is “sustainable”, rather than any kind of investment. In general, IPAs provide firms with information on local conditions, help speed up administrative processes and facilitate obtention of fiscal incentives, among others. This is true in OECD countries and other regions.  

There is growing evidence that IPAs are effective at this task, reducing cross-border information frictions and influencing firm location choices. Yet, when public resources are scarce and such help is free, a question emerges: which investors take priority?

Agencies are adopting new tools

To address this question, OECD IPAs developed new key performance indicators (KPIs) – that go beyond the monetary value of investment – to evaluate projects and guide their activities. In 2021, nearly half of OECD IPAs reported that they use indicators related to low-carbon transition, relying mostly on the information on the sector of the investor (see also an IDB blog).

OECD IPAs also started developing more complex tools to capture the sustainability of the assisted investment through the so-called sustainability scoring mechanism (SSM). In a nutshell, SSM permits agencies to evaluate an investment project using sustainability-related indicators and the score obtained helps them decide how much of its support, if any, a given project deserves.

For example:

• IDA Ireland has specific quantitative targets relating to green investments projects, building on the EU taxonomy.
• Poland’s PAIH and Czech Republic’s CzechInvest apply detailed metrics– ranging from energy intensity to land use – to investments supported by state-granted incentives.
• Some IPAs, including Germany’s GTAI and BusinessFinland, developed new questionnaires, based mainly on data provided by IPA staff and client firms.
• Other agencies, such as InvestinCanada or Costa Rica’s CINDE, used ESG and relevant administrative data to gauge internal sustainability metrics.

Overall, indicators relating to jobs, regional development and climate change remain most common, but the scope keeps expanding.

The sustainability scoring mechanism (SSM) is a set of predefined measurable indicators – beyond the investor’s sector itself – used to evaluate an investment project’s likely contribution to sustainable development. Such a mechanism can take numerous forms.  It can:   

• be a stand-alone tool focused on sustainability or part of a broader project scoring
• cover all projects or some that meet certain conditions such as benefiting from state aid
• may include quantitative targets or qualitative assessments (e.g. based on verifiable data or questionnaires)
• consider a wide or narrow set of specific sustainability-related indicators
• rely on pre-existing indicators, such as ESG scores, or be custom-made

As agencies experiment with new tools, a significant amount of learning is taking place.

The task at hand will require a good match between what is available and what makes sense. The good news is that the relevant approaches are similar to those in standard economics impact evaluations, where rigorous studies and relevant data exist. For example, studies combine IPA data on assisted clients and investor’s sector characteristics to assess IPA impact in low- and high-emission sectors or use firm-level emissions data to track firm behaviour.

In this context, the OECD – and others– can help in several ways:

• Assist governments and their IPAs to identify relevant indicators and sources of data to integrate into their monitoring and evaluation (M&E) systems

• Conduct benchmarking, identify good practices across countries and facilitate peer-to-peer discussions, including through the OECD IPA Network

• Design and conduct microeconomic studies geared towards specific country needs combining relevant data  

As the global agenda on sustainability is evolving, so will investment attraction. This provides a unique opportunity for IPAs to step into the forefront of countries’ quest for sustainability.