The sustainable investment sector is growing thanks to conscientious investors. By demanding ways to generate environmental and social returns along with healthy financial returns, investors are ensuring responsible investing options exist. Companies are noticing this increased demand, and are taking steps to attract responsible investors to their investment options. However, most of the information on sustainable and responsible corporate activity comes from the companies themselves — who are more inclined to overstate the good they’re doing rather than examine their true impacts. How can responsible investors be sure their sustainable investments do what companies claim, and it’s not a sales tactic?
Until recently, there was a lack of information on the true social impacts of companies compared to their financial impacts. Impact investors like to research data and sustainability issues to identify companies worth the investment, but this has proven difficult. To change that and make it easier for investors to make the right decisions, a team of scientists worked on developing a framework for identifying responsible investment options more accurately. Here’s what responsible investors need to know about this framework.
A New Framework There are metrics available for analyzing how investment vehicles perform financially, but not as many or effective metrics for measuring social responsibility. Social responsibility is hard to effectively quantify, but figuring out how to attach numbers to social returns is crucial to ensure investors make responsible choices. To this end, scientists from the City University of New York, and the Harvard T.H. Chan School of Public Health, as well as UBS Asset Management, developed a framework for judging a company’s social and environmentally responsible actions, products and services. Their goal was to take a more scientific approach to the process that didn’t depend on accepting the information companies reported. This will help standardize how impact is measured, and ensure it is verified and appropriately applied.
To develop this framework, the researchers focused on advances in data gathering in earth observation, epidemiology and public health fields. They linked this information to corporate operational and financial data to demonstrate the responsibility of a company’s practices. This framework will help identify investment options that promote four out of the 17 items among the United Nations’ Sustainable Development Goals — namely, clean water access, climate change mitigation, human health, and food security. It will be tested by analyzing a $2.1 billion portfolio of public equities managed by UBS Asset Management and PGGM for health and environmental benefits.
What This Means for Investors and Organizations Other metrics that measure sustainability largely focus on what goes on inside a company and how these practices support stakeholders and beneficiaries. However, they’re limited in the ability to measure long-term impact. There also is the issue of relying on self-reporting companies to honestly present information if it could present risks to their revenue. Institutional and individual investors are left with incomplete information about a company’s actions, products and services under a lot of metrics – meaning they can’t be certain of their sustainable investments’ ability to truly do what was advertised.
The goal of this new framework is to make it easier for investors to make wise and responsible decisions. Responsible investors like using data to help make investing decisions; a new framework based on data particular to responsible contributions can give them the insights they need to make their decisions. It is based on scientific approaches that provide a systematic and verifiable approach to measuring social success of companies. The numbers provided by this metric also will help investors make more accurate and direct comparisons between companies’ environmental and social impacts as easily and objectively as they can compare financial performances. Transparency is important in all investing, but especially in vehicles with environmental and social impacts. There is a lot of money to be made and invested in reducing pollution, keeping humans healthy, limiting climate change, and rebuilding and maintaining ecosystems, so it’s well worth the time and research into making sure the funds are used as effectively as possible.
A new framework also will help reframe the conversation around sustainable development. Sustainable investments aren’t just about financial capital but natural, human and social capital as well. Investors need a reliable way to know a company’s goods and services are doing their parts to heal and help, instead of passively earning goodwill. Creating a sustainable world where everyone benefits requires information. Investors and companies alike can create positive changes if given the opportunities, and quantifying opportunities and effectiveness can make these changes possible.
Embrace a New Investing Framework With Falcons Rock Impact Investments More consumers are choosing sustainable, environmentally friendly and socially responsible investment options, and more companies are trying to attract investors’ money. One-fifth of all the investments made in the United States has a focus on issues concerning environmental, social and governance factors, and the sector is only going to keep growing as more investors strive to make responsible investing choices. There is a lot of information to learn about this growing field, and a lot of research to do into making it better.
Falcons Rock Impact Investments can help investors get the information they need to start investing responsibly. We incorporate environmental, social and corporate governance issues into our investment analysis process, as well as our own practices. We hold ourselves to high standards, expect the investment vehicles we select for our clients to have high standards, and seek out disclosure on responsible investing issues. The result is a diversified, sustainable and responsible portfolio we work on with our well-informed investors. You can trust us to help you make the investing decisions that help your portfolio make not only environmental and social impacts on the world, but an impact on your wallet as well. Learn more about our impact investing process to get started.