SDG 16 is among the most underfunded of the UN’s Sustainable Development Goals and needs greater attention amid rising levels of violence, inequality and corruption, say impact investors.
UN SDG 16: Peace, Justice and Strong Institutions is among the most underfunded of the sustainable development goals and has received little attention in the investment media.
According to a September 2023 report by the UN, little or no progress has been made in achieving the indicators under SDG 16. The report revealed that human rights commitments are not being met, violence is increasing, inequality is hindering inclusive decision-making and corruption is eroding the social contract.
A year and a half on from the report’s publication, Ronald Lenz, director of innovation and programme director for the MENA region at the Hague Institute for Innovation of Law (HiiL), a Dutch NGO, says little has changed.
HiiL, which is largely funded by the Dutch Ministry of Foreign Affairs in addition to other donor agencies, collaborates with justice providers worldwide to develop solutions and improve systems that enable people to more effectively prevent or resolve issues of justice.
Since 2017, the NGO has been running a justice accelerator programme in east and west Africa and the MENA region, scouting for justice startups and entrepreneurs that can help address specific issues, ranging from employment and family law, to land rights and gender-based violence.
Lenz explains that HiiL has supported around 170 startups to date through the programme, which includes providing them with seed funding and a five-month training programme. It is the success of this programme that led to the launch of the Innovating Justice Fund in partnership with Dutch impact investment advisory firm FOUNT.
“We saw that the startups that had finished our programmes faced the same critical ‘missing middle’ problem of financing that many other startups face when trying to scale. They were getting to a stage where they were not yet Series A ready but needed around three to five hundred thousand euros worth of funding to continue to grow,” says Lenz, adding that they partnered with FOUNT because there was no impact fund for justice operating in the areas they were trying to address.
Perception and awareness
Unfortunately, the Innovating Justice Fund has since been put on hold, because of what Lenz describes as a “tough” fundraising environment over the past two years, exacerbated by the fact that investors “simply do not have justice on their radar”.
One of the reasons for the lack of interest from investors is the fact that justice is still perceived as a public sector responsibility, he explains. “Impact investors don’t see why they should get involved in something they see as the remit of local and national government.”
Robert Ryan, CEO of Aristata Capital, a London-based impact investor specialised in the field of litigation funding, adds that awareness of the extent of the justice gap has also been low, particularly in the area of litigation financing.
“Anecdotally, there is growing interest in addressing the justice gap but there is still a lack of awareness of the extent of the problem and the challenges that many face in accessing the international system of justice, particularly in commercial claims. This says nothing of the many smaller scale justice needs, which extend far beyond the reach of what we do,” he says.
Aristata manages the £52m (€62m) Aristata Impact Litigation Fund I (AILF I), which supports commercial litigation brought by individuals, communities, natural ecosystems and other entities around the world in response to damaging activity by companies, who would otherwise not have the resources to take their cases forward, and where a win would have a beneficial and wide-ranging outcome in terms of impact.
Litigation finance as an investment strategy and as an asset class has only appeared on the radar of impact investors in the last three to four years, according to Ryan. “When we were going out to the market for the first time in 2021 most of the impact-focused LPs we met with were large institutions, family offices and other funds and our fund was the first litigation finance investment that any of them had ever made.”
The power of inertia
In the case of commercial litigation, awareness is also low because, according to Ryan, most cases are settled out of court. “If you take the UK as an example, north of 90% of claims are settled out of court between the affected parties,” he says.
Inertia also plays a role in the lack of funding to address the issue. “Often it’s because it is simply assumed that business will go on as it always has done,” adds Ryan.
Investor returns
Unlike the Innovating Justice Fund where returns are linked to the growth of the underlying investments, in litigation financing investor returns are generated through the compensation awarded from the court if litigation succeeds.
Ryan says that at Aristata the return on impact is as important and measured in several ways, focusing both on the case itself and on the broader context. For example, if the case addresses environmental damage, the metrics used might be a range of data relating to the clean-up of an oil spill and the compensation granted to affected communities. The pervasiveness of the problem and the impact on the behaviour of commercial actors in the sector would also be considered.
“If we’re successful in one particular claim, we can create opportunities for ourselves and for others to replicate and drive further impact. We think this is really exciting,” he says, adding that it is also about sending a commercial signal to the market that it is no longer worthwhile for companies to continue pursuing a particular damaging behaviour.
Lenz adds that investors wanting to address the justice gap in emerging markets also have to be willing to accept some risk and single digit returns but that they would be rewarded with a high return on impact.
“If there is one sector where you can have a huge impact it’s justice,” he says. “By addressing the justice gap, investors cannot only improve people’s economic situations, but also their health and wellbeing. There are also spin-off impacts such as economic stability and growth.”
Outlook for justice
Lenz says that for justice-related startups to thrive, there needs to be a more enabling regulatory environment and greater innovation. “Law firms are not always set up in the most innovative ways to respond to local needs and there is often not the receptive environment needed for these more innovative services to scale,” he adds.
Lenz concludes by saying that he doesn’t know when or even if they will start to fundraise again for the Innovating Justice Fund. Nevertheless, he sees traction to raise capital in the future at what he calls the “nexus of justice and economic growth” and at specific intersections of justice with other important issues such as gender equity.
“These are the areas where I have some hope that there will be more funding freed up from both private and public resources and we will advance some of the SDG 16 indicators,” he adds.
Looking ahead, Ryan is encouraged by the growing recognition of the justice gap. His firm, he says, is also beginning to work with large philanthropic foundations who have experience of funding litigation strategies in the public interest, to see if there are opportunities for litigation funders with access to private capital, such as Aristata, to fund commercially viable cases.
“You have these large philanthropically funded foundations like the Open Society Foundation who are, through their philanthropy, financing impactful litigation but which is not necessarily commercial,” he explains. “Then there are commercial claims that are being funded for the financial return and for impact but those two ecosystems are currently not coordinated.”
“In the future, these foundations’ work should be generating investable cases for us and other litigation funders. We see this as a very important bridge to put in place.”
