Measuring Investors' Contributions To The Sustainable Development Goals

Posted by Robert / 6 days ago / 0 Comments

Companies and investors are being asked to support the 17 Sustainable Development Goals (SDGs) for 2030 - what some have described as "the closest thing the Earth has to a strategy"- since the public sector alone does not have the resources to do so. With Professor Costanza Consolandi of the University of Siena I have written about how companies can use the work of the Sustainability Accounting Standards Board (SASB) to assess the impact they are having on the SDGs.

But what about investors? For them the problem is a more difficult one since they hold large portfolios of companies and must aggregate information about all of them. An additional complexity is that the very large asset owners and asset managers must pay increasing attention to the system-level effects of their investments. Are their investments making a positive or negative contribution to the financial, environmental, and social systems that support human life on Earth? Sudden shocks (e.g., the Financial Crisis of 2008) and steady and persistent degradations (e.g., from climate change to inequality) in these systems will make it impossible for investors to earn the returns expected by their ultimate beneficiaries-all of us.

The Investment Integration Project (TIIP), under the leadership of Steve Lydenberg (Founder and CEO) and William Burckart (President and COO) is a research services firm that provides guidance to investors on system-level issues. Its mission is "to help institutional investors understand the feedback loops between their investments and the planet's overarching systems that make profitable investment opportunities possible." Just as modern portfolio theory extended analysis of individual stocks to a basket of stocks, TIIP helps investors to move their level of analysis beyond just portfolios to include the context in which these portfolios exist. This is important because failure to do so will lead to dramatic disruptions (e.g., the Financial Crisis of 2008) and steady or even dramatic degradations (e.g., from climate change and inequality) that will make it impossible for investors to earn the returns necessary to meet the expectations of their beneficiaries and clients, respectively.

Today, in collaboration with the Investor Responsibility Research Center Institute (IRRCi), Burckart, Lydenberg, and Jessica Ziegler have published a new report Measuring Effectiveness: Roadmap to Assessing System-level and SDG Investing. A companion document to the report, Measuring Effectiveness: Roadmap to Assessing System-level and SDG Investing-Supplemental Appendices, contains a series of appendices that support and provide additional context for and information about the concepts discussed. This report was first discussed at a conference, available on this video, that was held at Morningstar on February 8, 2018. As explained by Burckart, ""TIIP has spent the past three years growing a shelf of research and guidance, and a database that covers the basics of systems-level investing. With this new report we are tackling the challenging questions of how investors can measure their influence at a system level, and how investors can tell who is doing a good job and who is doing a better job. Over the course of 2018 we will be applying this framework to different issues, such as income inequality, as well as releasing comprehensive guidance for reporting on system-level investing progress."

The report describes a process for how investors can determine their influence on four foundational characteristics of environmental, societal, and financial systems which serve as the core indicators of a system's health and resilience (or lack thereof):

Adaptability: the environmental, societal, or financial systems' ability to adjust to shocks and major disruptions (e.g., high adaptability, or self-regulation, helps systems better adjust to unanticipated external shocks)

Clarity: the coherence, flow, access to, and transparency of information about and within a system (i.e., more information flows among actors and about system components-and their interrelationships-increase investors' ability to understand their influence and act accordingly)

Connectivity: the value of a good or service is determined in part by how many people use it and the more it is used the greater the benefit to the system (i.e., systems so structured have positive feedback loops that increase their health and resilience)

Directionality: market incentives structured to encourage positive changes in stakeholder behavior (i.e., healthy systems are those in which influential actors enhance positive characteristics and align their actions with the systems' fundamental goals)

The process is based on a roadmap whose steps are:

Assess system-level issues appropriate for their consideration and establish commensurate influence goals against which to measure progress 

Assess the potential usefulness of the tools available to investors for creating system-level influence

Measure influence on system characteristics

As always, measurement is especially challenging. To help with this, Supplemental Appendix C provides a very useful summary of some key measurement frameworks with appropriate links. These include the Impact Management Project, the Global Impact Investing Network's IRIS initiative, Sourcebook on Emerging Good Practice in Managing for Development Results, and the SDG Compass of business indicators.

Supplemental Appendix D provides a number of useful examples showing how different types of investors are already assessing their system-level impacts. These include the Heron Foundation, the Dutch pension plan PGGM, the private equity firm Sarona, the impact investment firm Sonen Capital, the asset manager Wellington Management, and the sustainability investor WHEB.

Given the system-level focus of TIIP, the report emphasizes the importance of collective action. If only a few asset owners and asset managers, even the largest ones in the world, focus on and measure the system-level effects of their investments, we won't get the results we need. Towards that end, the report identifies three levels of influence by investors. At around 10% of involvement by the world's largest investors recognition about and legitimacy for considering system-level issues will get the attention of all necessary stakeholders. At the one-third threshold, a culture change will start to change in the financial community, creating positive spill-over effects on corporations, government bodies, and NGOs. But it will take two-thirds of the world's largest investors of all types (e.g., pension funds, sovereign wealth funds, endowments, financial services companies, mutual funds, private wealth management firms, and activist hedge funds) across all asset classes (e.g., public and private equity, fixed income, real estate and other alternatives, and infrastructure) before positive system-level benefits will be achieved.

Commenting on the likelihood and timing of this happening, Lydenberg observed that, "We've come a long way over the past decade in measuring the sustainability impact of corporations and other investments, and in aligning our portfolios with sustainability goals. The next step down this road on which we have embarked is being able, at the same time, to intentionally enhance the long-term value of the environmental and other capitals on which our investments depend. In our increasingly interconnected and complex world, investors with a long-term horizon are starting to take this logical step, essential for us all."

Dr. Bob Eccles , CONTRIBUTOR

Opinions expressed by Forbes Contributors are their own



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