The Thinking Ahead Institute has warned institutional investors of risks they face if their focus on measuring investment impact is not linked with value creation.
In a research report from its sustainability impact working group * – Sustainability: understanding impact and value creation – the Institute said investors need to be wary of the gap between their positive intentions for a more sustainable economy and their ability to deliver it.
Marisa Hall, co-head of the Thinking Ahead Institute, said: “Most investors tend to focus on the measurement of their impact but stop short when translating this into an evidence-based narrative that clearly explains how these sustainability metrics translate into value and outcomes for each stakeholder.”
She added: “Critically this should also include future expectations that can inform investors’ deployment and stewardship of capital.”
To help bridge this gap the working group identified five practical steps for creating and measuring value:
- Identify who the key stakeholders are and understand their expectations and needs in order to determine what is valued;
- Align organisational purpose with the desired outcomes by understanding which stakeholders the organisation prioritises;
- Identify gaps between current practice and desired norms that align with the organisation’s beliefs and value systems, evaluating these systematically through tools such as questionnaires and scoring systems;
- Openly discuss the results and gaps to develop an internal action plan;
- The working group recommend that the output of this impact and value creation assessment should be communicated externally.
“Historically articulation by the investment industry of value creation linked to purpose and impact has been poor,” Hall said, but noted that this is changing as stakeholders increasingly expect “authentic, intentional and transparent communication”.
“While challenging, we believe this can be achieved by using the integrated reporting framework or, in practice, producing an integrated report,” she added.
Herschel Pant, senior consultant at AXA Investment Managers, one of the members of the working group, said: “We believe that sustainable investing does not need to compromise on financial return, however, measurement is key without which we are all in the dark.”
He said that an investor could have “the best sustainable strategy in the world, but it needs to demonstrate its effectiveness.”
Hall added: “Now, more than ever, we believe that investors need to embrace a systems framework for investing, which recognises that all businesses and all investment portfolios cannot be considered as independent from wider society and the environment.”
She noted that for a long time investment has been seen as a two-dimensional problem of optimising risk and return.
“In reality it’s always been three-dimensional: investment also impacts the world around us. We believe managing impact improves risk and return outcomes, therefore using this framework will help investment organisations address all three together and effectively communicate their overall value added,” she concluded.
* The sustainability impact working group comprised representatives from: AXA Investment Managers, Coronation Fund Managers, Dimensional Fund Advisors, the International business of Federated Hermes, First State Super, QIC and Willis Towers Watson.