Investors who allocate capital to save the Brazilian rain forest or promote clean water in India have many metrics at hand to measure risk and financial performance. But how can they know if their dollars are making a difference in solving some of the world’s most pressing social and environmental problems?
Cambridge University’s Investment Leaders Group (ILG) is developing a framework that seeks to measure return on sustainable investment. In a recent report, the ILG outlined six business and investment themes to help quantify the social and environmental outcomes of impact investments.
The themes are based on the 17 sustainable development goals (SDGs) set by nearly 200 member governments in the United Nations to end poverty, fight inequality, and tackle climate change by 2030. “[The SDGs] are the closest thing to a strategy for planet Earth over the next 15 years that humanity has ever generated,” the report said.
The ILG believes the new framework will help the financial industry improve accountability with reportable data that enables investors and portfolio managers alike to make more informed choices. It hopes the new methodology, still in development, will trigger a “consumer revolution of choice,” similar to what happened in the food industry, where increased transparency has led to more sustainable choices.
Tackling a Long-Standing Roadblock
Measuring return on sustainable investment has always been challenging for impact investors without uniform metrics that can be applied across industries, asset classes, and geographies.
The lack of quantifiable standards has impeded investor understanding and transparency even as appetite for impact investments has been rising steadily among institutions and individual investors. A 2017 survey of 209 global investors published by the Global Impact Investing Network (GIIN) reported a total of $114 billion in impact assets worldwide, with expected growth of 17% by the end of the year.
At the same time, pensions and institutions are facing tougher regulatory requirements and have growing concerns about the connection between environmental risks and global economic stability. The new data can eventually be used on fund fact sheets, requests for proposals, policy statements, and beneficiary communications. The framework will help to enhance investor education and draw in new capital while also helping to advance the UN’s sustainable development goals.
Creating Universal Metrics
The ILG comprises pension funds, insurers, and asset managers affiliated with the Cambridge Institute for Sustainability Leadership (CISL). The six themes of the framework it’s developing focus on the outcomes the economy will need to deliver to meet the sweeping SDGs:
- Decent work: Secure, socially inclusive jobs and working conditions
- Climate stability: Limits to greenhouse gas levels so that the global temperature rise will stabilize at under 2 degrees Celsius
- Basic needs: Food, water, energy, shelter, sanitation, communications, transport, credit, and health
- Well-being: Enhanced health education, justice, and equality of opportunities
- Resource security: Preservation of natural resources through efficient and circular use
- Healthy ecosystems: Ecologically sound landscapes and seas for nature and people
Decent Work and Climate Stability
Developing metrics to quantify return on sustainable investment will take time. The ILG has completed initial research on the first two themes—decent work and climate stability—and will continue work on the other four over the next two years. The framework includes a three-tier approach to crunching numbers: a base metric of existing data that will give way to enhanced “stretch” and “ideal” measures as they become available over time.
For example, total number of jobs is the base metric for decent work, adjusted for unemployment. A stretch measure would take into account compensation levels above 60% of the national median wage, as well as jobs added along the supply chain. An ideal measure would go a step further and incorporate a living wage, a threshold used by the Organisation for Economic Co-operation and Development (OECD) to show relative income poverty.
Research from the new framework has already produced some initial takeaways on the social and environmental performance of two baskets of stocks. The findings? The CAC40 Index garnered a “very low” rating on decent jobs, while the Stoxx600 Index earned a “negative” for its impact on climate stability. A reminder, perhaps, that more work needs to be done.