The next frontier of sustainable investment: impact measurement

“When we talk about ESG in investment management, what are we talking about?” – George Seraphim

This question was raised before an expert panel discussion at the CFA Institute’s Alpha Summit last month.

As Charles M. Williams Serapheim, a professor of business administration at Harvard Business School, explains, capitalism has created enormous wealth and lifted countless people out of poverty. But it faces two major challenges today: climate change and inequality.

“The resources that have been created have been allocated very, very unequally,” he said. “As a result, many people have been deprived.”

The ESG challenge is to provide economic prosperity and protect the environment, while, in Seraphim’s words, “to empower people to participate in the process of creating economic value.”

So what is the state of ESG analysis and how can investors both make an impact and invest with impact?

Serafim and co-panelist Melania Adams, Head of Corporate Governance and Responsible Investment at RBC Global Asset Management and CEO of Perview Investments Linda Zhang Ei and other ESG- and Sustainable Investment-related questions with moderator Mary Childs Planet Money.

Following are some key highlights of their conversation.

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Material material

Materialism is a strong force and panelists said that the focus on material ESG factors can increase income. That means investors should include a material lens when conducting their valuations. But they must be aware that the material lens differs from one sector to another.

“The material means that the ESG factor will affect the company’s financial performance,” Adams said. “It depends on the industry. If you look at financial institutions, of course, cyber security would be highly materialistic, not too much, probably for a food and beverage company. ”

What are the benefits of materialism?

“Increasing the financial specificity of ESG issues is a huge process for change,” Serapheim said. Once some object is done, it is measured and the c-suits and boards handle it. Why? Because once it is measured, the executive vibrates with it. And this is becoming the case with component ESG metrics. This will help investors better manage the risks and opportunities.

There is still a long way to go for ESG data. Reliable, efficient ESG metrics require quality data, and although progress has been made, it is not yet there.

“The information has improved a lot,” Serafeim said. “But at the same time, it’s not very comparable, it’s not very timely. In many cases, there are lots of sounds instead of signals.

Over time, socio-relevant ESG issues will become business-relevant, according to panelists. There will be different levels of materialism in different subjects. For example, the carbon emissions profile of the technology sector is not the same as in other industries. Its products do not produce or use emissions, but its data centers are energy intensive and staff members can leave large carbon footprints when adding all their travels.

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What about delivery? Did the panelists think it was a good idea to screen out or move away from a company that does not produce ESG grades?

Everyone agrees that delivery is a priority for engagement and should always be the first step when working with the company. Effectively severing relationships, there is no voice to influence investors. As a starting point, the panelists encouraged investors to engage with all of their companies in their net zero goal.

“We know that fossil fuels will probably be part of our energy mix for the next 10 years,” Adams said. “And so from our perspective, it’s more valuable for us to be at the table with companies thinking about how they’re going to transform into a low-carbon economy.”

The panelists further stressed that engagement is not equal to compromise. Teeth are needed for effective engagement. Investors need to set milestones and criteria over time that determine what companies will achieve. Green is easy to wash: any company can talk. But if they don’t support it with concrete steps, investors may find themselves at unreasonable risk and have to be prepared to leave.

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The value of the expression

When the discussion turned to the criteria for publication, the panelists agreed that there was currently a movement, among others, leading to global standards, including SASB, IFRS and TCFD. Impact standards are not yet here, and they are still in their infancy stage.

In order to influence investors, according to panelists, their portfolios need to be aligned with the larger global challenge for two reasons: First, in a human-capital-intensive economy, ESG strategies are important. Second, we are “investment consumers”.

“We can adjust our costs to our values,” Serapheim said. “This is another mega trend that I think we will be monitoring for the next two to three decades.”

Everyone is becoming an investor as the barrier to entry is removed. Currently, more than half of the U.S. population invests. So there are ample opportunities to choose securities where we want the world to go. If we want to tackle climate risk, protect biodiversity, or reduce inequality, we must invest that way. ESG needs to address these three areas in order to be a strategically relevant, and competitive company. As investors, we can help deliver that message.

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Carbon offset

To mitigate climate change, carbon offsets can be a useful tool.

“Many corporations are actively embracing both the reduction of emissions, the reduction of their waste, the improvement of utilization, as well as the purchase of credit.” See the price2At the beginning of the year, the price was $ 36, or $ 38, and now it’s over $ 56.

But again, the nature of the data is important. Companies need to look at the quality of offsets, to make sure they are audited and retired. It is difficult to achieve the goal without both.

So what advice did the panelists have for those who want to enter the field of impact investing?

One key recommendation is to take your career where it is going to improve. Climate change and its threat will change the economy in the next few decades. Some sectors will be completely disrupted, and alpha opportunities exist where disruption occurs. It will be an exciting environment, but emotion alone will not be enough for success. Success requires technical skills.

But that technical skill can take many forms. ESG and sustainable investment is not a one-size-fits-all environment.

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“One of the biggest things I think is how wide the ESG’s space is, how many different measurements there are, and we’re very focused on climate change right now,” Adams observed. “But there are other ESG metrics that we also need to focus on.”

He pointed to cybersecurity as a key consideration that has recently begun to receive the attention it deserves. And Adams emphasizes the importance of getting the third letter correctly.

“If you don’t have proper governance, you can’t manage your E&S properly,” he said.

As a group though, the panel has created an optimistic, optimistic tone despite the challenges.

“Humanity faces incredible opportunities at the moment,” Zhang observed. “We’re at the dawn of a new industrial revolution, right, and it could be a green one.”

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All posts are the author’s opinion. As such, they should not be construed as investment advice, or the opinions expressed must not reflect the views of the CFA Institute or the author’s employer.

Image Credit: © Getty Images / guvendemir

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Matt Orsagh, CFA, CIPM

Matt Orsagh, Director of Capital Market Policy at CFA, CIPM, CFA Institute, where he focuses on corporate governance issues. He was named one of the “Rising Stars of Corporate Governance” in 2000 by the Millstein Center for Corporate Governance and Performance at the Yale School of Management.

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