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ESG: Bridging the impact data gap

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  • Investors are increasingly relating investments to sustainability challenges
  • A joint academic-investor project finds inadequate sustainability impact data
  • It proposes metrics for relative impact in anticipation of data improvements

For various reasons, over the past few years, more and more mainstream institutional investors and other groups have become explicitly concerned with the environmental and social impacts of investments. This is distinct from, but does not replace, thinking about how environmental, social and corporate governance (ESG) factors can affect an investment portfolio’s financial performance.

Victoria Leggett, European equity manager and head of responsible investment for asset management at Union Bancaire Privée (UBP), said at a recent conference that clients – family offices, large institutions and retail investors – have been making clear they are “desperate for comparable, transparent, and simple data or ways of showing social and environ- mental data on their fund choices.”

She added: “It’s strange and also wonderful that for such a disparate set of clients with such different ambitions for their investments and different outputs there has been a really consistent message.”

Leggett was speaking at the launch event for the Cambridge Impact Framework, a tool she says can help asset managers to begin to meet those client demands. UBP, which has CHF128bn (€111bn) of assets under management, is using the framework to select companies for its relatively new ‘positive impact equity’ strategy.

Developed by the Investment Leaders Group (ILG), a network of 12 asset owners and asset managers, and the Cambridge Institute for Sustainability Leadership (CISL), which convenes the ILG, the framework allows the industry to quantify investment impacts.

Ultimately, it is a set of six metrics that investors can use as proxies for their progress towards the UN Sustainable Development Goals (SDGs).

For six different themes, the framework presents an ideal impact measure and then, after seeing what is available in the way of raw data, a “base” metric.

For example, the ideal metric to measure a fund’s contribution to “decent work” is identified as: the total number of open-ended employment contracts excluding jobs below 60% median wage and jobs in poor working conditions, adjusted by the national employment rate.

For reasons including that companies do not generally reveal the types of contracts they offer to staff, however, this ideal metric cannot be applied today.

A “reasonable, practical alternative”, according to the ILG and CISL, is to assess the total direct employment of a company expressed in full-time equivalent workers, as this is collected by information providers today.

This process of identifying ideal and base metrics was followed for the five other themes into which the ILG previously distilled the SDGs – healthy ecosystems, climate stability, wellbeing, basic needs, and resource security.

In a report about the framework, the ILG acknowledges the practical measures are “pale shadows of their ideal cousins”.

“If the objective is to calculate the absolute sustainability of a fund they are by no means satisfactory or fit for purpose,” it says.

However, they “offer a courageous ‘best effort’ to kick-start impact analysis based on easily available data today”.

According to Jake Reynolds, executive director at the CISL, identifying and pointing out the data gap is important, because, against the backdrop of “a glut of [ESG] information” in the market, “many people won’t necessarily see a deficit of data”.

“What we pointed out methodologically is that if you wish to understand the impact of a fund to any degree of quality, you’re going to have a very hard time at the moment,” he tells IPE.

“That’s not a criticism in any way of the data houses, it’s the fact the world hasn’t focused on this,” he adds.

At the launch event in London, Leggett stressed that the framework can be used across asset classes and is not “specific to the sustainability world or impact world”.

Another benefit was that it used raw data, and was therefore data provider “agnostic”.

On the subject of the framework’s limitations, she mentioned the “huge gap” between the ideal and practical measures. She also pointed out that the framework did not consider the revenue streams of investee companies, instead focusing on their operations’ contribution to society and environmental footprint.

 the ideal versus the practical

But the framework was “a fantastic step forward”, she said.

It was a platform from which to advocate for better disclosure but also a tool the investment industry could use “to give something useful to the client right now,” she added.

The ILG and CISL are keen for people to appreciate what the impact framework is about, and what it is not.

“Clearly,” their report states, “reporting the alignment of a fund with the SDGs is a different proposition to deploying capital at scale to achieve them”.

“To do that,” it continues, “investors will need to become accustomed to raising and deploying capital with broader aims than the majority of investment today – for example, through significant direct investment in socially positive assets, particularly in (but not limited to) low income countries where the needs are greatest.”

Engagement can also help effect change, however, and Reynolds says that the results of applying the framework to a fund could be helpful for “influencing companies through better knowledge of their SDG alignment”.

Speaking at the launch event, Reynolds said the framework was “the beginning of a pretty interesting discussion”.

“When you read the report you’ll see for each of these themes it’s like a funnel. We give the high level background to the issue, we then get down to the measures and finally the practical application.

“That story, I think, is absolutely crammed full of ideas and possibilities that could be useful in an engagement discussion with an asset. So hopefully it will be empowering in that respect.”

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