Major investors fail to show the full extent of the environmental and societal impact of their investments. They often blame a lack of data, but this does not simply justify not providing any information at all about their performance. A jointly developed standard for measuring the social and environmental effects of investments would make an ideal first step.
ESG has become an integral part of the investment policy of investors. But what are its benefits? This may seem a simple question, but the answers are rather complicated. In short, our conclusion must be that, so far, we can't really say much about the impact of our sustainable investments. Let alone that we can compare the impact of various investments in a consistent manner.
Today's information provision is mostly limited to individual listed companies. The so-called ESG ratings they are given by various providers show very little correlation. As a result, the data made available to investors hardly has a common denominator and cannot be grouped. This in turn means that insurers, pension funds and asset managers practically never report on the impact of their sustainable investment policy at an aggregate level. And to the extent that they do, the frameworks and methodologies that they use vary so widely that the results are simply incomparable.
Nevertheless, stakeholders of these major investors do need that information. And if the financial industry joins forces – in my opinion – this dilemma can be solved.
The lack of data is not the biggest problem, in my view the challenge is rather that every major provider (including the data providers mentioned) wants their definitions, their formats and their frameworks to be dominant. As a result, many different frameworks and classification systems are in use today. From stars and globes (which simply add up the various environmental and social topics for the sake of convenience), to highly complex frameworks that raise more questions than provide answers. Add to that the fact that providers consider their own methodology to be superior, the result is a stalemate. Effective communication with stakeholders about the impact of investments requires a standard that reflects performance in both absolute and relative terms. But as long as parties do not accept each other’s standards and hold on to their own criteria, such a uniform standard will never come about.
Cooperation is the only solution. Large investors and asset managers will have to work together to clear away the obstacles. This is something to be expected from the sector. Everyone takes it for granted that there are standards for the financial return of investments, so why don't they exist for the social return and the environmental returns of investments in a market where ESG factors, too, are becoming crucial? A widely applicable and transparent standard that also provides insight will help to show what we are achieving in the field of ESG.
The continued development of climate measurement methods shows that this is possible. Financial institutions are extensively working together on this and played a key role in its development and standardisation. This has yielded significant benefits. As a result of close cooperation, clear guidelines for the way in which organisations measure and report on climate have been created.
The fact that this is an incredibly complex challenge should not be a reason to ignore it. After all, it also gives us the possibility to create a starting point from which we can grow towards a definitive standard in the coming years. A standard that forms the basis for measuring the impact of all investments: from those of development banks, private equity and impact investors to the credit portfolios of banks.
Until that time, we really don't need to hide behind a 'lack of data' as an argument. We can already anticipate the future by making optimal use of the data that is available. Let's not wait another decade before setting this in motion. We can, for instance, use regular financial data when providing information on the sustainability of investments. And an item like ‘tax paid’ can be a perfect indicator of the organisations contribution to societies well-being.
Do you have any suggestions on how to address this? Good examples and concrete actions? Please let me know! Multiple parties in the financial sector have already shown an interest. Let's take the first step together!