I have written in previous posts about the ever-growing wish, or indeed requirement, for sustainable thinking to be incorporated into investments decisions. Part of the challenge is actually imagining the future state we wish to secure. Do we project forward with reference to what has happened historically and assume a gradual evolution of change? Given the rapid change of global temperatures we perhaps cannot afford the luxury of such a measured approach. Moreover, climate change is just one of a number of competing priorities in this area. Or do we hope instead for the realisation of some form of as of yet undiscovered innovation and technology to bail us out of the problems we are inevitably going to face? Neither solution is particularly palatable. The problem is further exacerbated by fractured debate on definitions and priorities.
From the perspective of the institutional investor the main dilemma regarding sustainable investing is squaring the principle function of acting in the financial interests of the end beneficiary, with the wish to not do harm. Can you do well (financially) by doing good? A further challenge is actually assessing the impact-adjusted value of the investment. We have plenty of metrics to assist us in determining whether an investment has the potential to add financial value, but there is a dearth of comparable measures when it comes to social impact.
This lack of clarity or, indeed, uniformity of approach leaves the industry open to vaunt its good intentions or positive ESG deeds in the broadest terms. The cynical view is that the talk is without substance or, at worse, is transforming via ‘greenwashing’ ordinary investment approaches into ESG friendly strategies. On the flip side there are undoubtedly many asset managers that have been incorporating ESG criteria into their investment processes for many years – just not under the label ESG – and are viewed as lagging because they are not succumbing to marketing temptation of branding products ‘sustainable’.
Given the above, it was interesting to read an article concerning two organisations (The Rise Fund and Bridgespan Group) that came together to create a methodology to estimate the financial value of the social/environmental good created by an investment.[1] Through their collaboration they created a metric – the “impact metric of money (IMM)”. The calculation involves a 6-step process that they apply to each investment opportunity starting with the ‘relevance and scale’ – what is the underlying investment seeking to do that will have an impact and how extensive will the benefits be. The process then looks at the likely social or environmental outcomes and assesses the economic value to society. The process is risk-adjusted and an assessment of the terminal value of each business is conducted, with the final analysis being the calculation of the social return of every dollar spent in the investment.
The Rise/Bridgespan methodology was applied specifically to an area of impact investing. The real challenge will be to create something similar for more mainstream strategies. I would be interested to know if something does exist or in development; something to add to the plethora of financial measures used to assess the attractiveness of a given opportunity.
[1] Calculating the value of impact investing, an evidence-based way to estimate social and environmental returns, Harvard Business Review, January-February 2019, pp. 102-109.
