A dashboard developed by CISL's Investment Leaders Group, including PIMCO, Union Bancaire Privée and Zurich Insurance provides metrics to assess corporate social and environmental impact. Terry Slavin reports
Cambridge University’s Investment Leaders Group has developed a framework that allows investors to measure the impact of their investments against the Sustainable Development Goals.
The Investment Leaders Group (ILG), a global network of pension funds, insurers and asset managers convened by the Cambridge Institute for Sustainability Leadership (CISL), has created a dashboard, called the Cambridge Impact Framework, that uses existing data to help the industry assess funds against six themes derived from the 17 SDGs: resource security, healthy ecosystems, climate stability, basic needs, wellbeing and decent work.
The dashboard uses a traffic light system to categorise impact from very negative (red) to very positive (deep green).
We struggle to answer one of the most basic questions that can be asked about a fund: Is it doing harm or good?
But Dr Jake Reynolds, executive director at the Cambridge Institute for Sustainability Leadership, and lead author of the report, warned at the launch event at the Institute of Directors in London last week that the framework is only a crude approximation, compared to the ideal metrics that will need to be developed in future to measure impact.
“The reality of environmental and social disclosure is that we struggle to answer one of the most basic questions that can be asked about a fund: Is it doing harm or good?” Reynolds said.
“It’s very hard to properly generate, with today’s data, the tests that you’d want to make on a fund. These would be extremely complicated, deep evaluations of a firm’s operations and its value chains.”
For example, on decent work, ideally one would want to know the total number of jobs that pay a living wage and offer safe and healthy working conditions. However the closest approximation today is data from Bloomberg on the number of workers in full-time employment.
When it came to measuring resource security, the best information available to the industry at scale was total net waste. But the ideal metric would explore losses of products into the environment as well as toxicity and scarcity of materials within a circular economy.
And on the healthy ecosystems theme, the closest approximation was data on fresh water use. “That’s a pale shadow of what we want to be measuring,” Reynolds said.
All investment has impact, and arguably it’s more important to discover what the impact is of a fund when it is very conventional
The report proposes both ideal and base metrics for each of the six SDG themes, so that fund managers can make the first stabs at measuring impact, while the industry tries to come up with better metric over the longer term. Both sets are intended to provide objective, comparable, consistent and reproducible results.
Reynolds pointed out that getting an accurate measurement of social and environmental impact was not just a question for impact funds, which have a desired social or environmental impact. “All investment has impact, and arguably it’s more important to discover what the impact is of a fund when it is very conventional. This goes right across the capital mix.”
Union Bancaire Privée (UBP), one of the members of the Investment Leaders Group, stress-tested the framework on its newly launched Positive Impact Equity fund, a portfolio of 25-35 stocks of companies that “address the world’s most pressing environmental and societal challenges”.
Victoria Legett, head of impact investing at UBP, said: “There is building momentum from our client base for a product like this.”
Legett said she had feared that the dashboard would flash red in most categories, but on well-being and basic needs, the fund was in very positive territory, in decent work it was positive, while it was neutral for healthy ecosystems, and negative for both resource security and climate stability.
She pointed to the huge gap between the ideal metrics and those that can be practically used today to measure impact in the dashboard.
By using the framework we can move into the carbon footprinting space with much more clarity
“It’s not a silver bullet. It’s not a complete solution. We are just not there as an industry yet. But it is a really exciting shift and in making a start we are creating hopefully a platform, and from this platform we can both advocate for improved disclosure and at the same time give clients something that is practical and comparable right now.”
Johanna Koeb, head of responsible investment at Zurich Insurance, said the framework would help with its target, set in 2017, of doubling its impact investment to $5bn of its $200bn under management. Zurich has a goal of improving the lives of 5 million people a year, and saving 5 million tons a year of CO2 equivalent emissions.
She said the framework would help Zurich footprint its investments for positive and negative impact “looking at what the underlying assets are doing and the traces companies leave in the world, including their climate impact”. Until now, she said, it has not been easy. “But by using the framework we can move into that space with much more clarity.”
By allowing funds to get an outcomes perspective, “it really completes the picture of who we own”.
Niamh Whooley is senior vice-president for ESG at California-based investment manager PIMCO, which oversees $1.69trn in global assets on behalf of retirement savers, public and private pension plans, educational institutions, central banks and government agencies, sovereign wealth funds, and foundations and endowments.
She said the company applies ESG integration across all its holdings, and while it only measures impact in the smaller universe of its impact funds, Pimco has the longer-term ambition to apply impact metrics to its entire portfolio.
Many of the issuers are framing their activities within the positive lens, but not disclosing the trade-offs in terms of their negative impact
“We have already begun this journey in a number of areas,” she said. For example, with SDG and green bonds it has a proprietary screen for pre- and post-issuance seeking evidence to significant positive outcomes compared to business as usual.
On the climate theme, she said PIMCO believes it is nearer in alignment to the ideal metric, as the ESG desk has worked with the energy desk to develop tools to evaluate the impact of climate change on its portfolios.
On other themes, available data is more limited. She pointed out that PIMCO in November evaluated the level of ESG data provided by 240 of its largest corporate and financial issuers.
Pimco's Niamh Whooley says the need for common impact indicators has never been greater. (Pimco)
While 63% mention the SDGs in their annual reports, and 39% had mapped their business activities against them, only 19% of those that referenced the SDGs have set qualitative targets to meet the goals.
“Many of the issuers are framing their activities within the positive lens, but not disclosing the trade-offs in terms of their negative impact of their operations and value chain.”
Nor were they looking at the inter-relationships between impacts like climate, water and air pollution.
We are delighted to have been part of the ILG initiative, which has provided us a toolkit to start the measurement journey
She said the need for companies to converge on a common set of impact indicators has never been greater.
“We are delighted to have been part of the ILG initiative, which has provided us a toolkit to start the measurement journey.”
She said PIMCO planned to do more collaborative work using the new toolkit, including as part of the Climate Action 100+ group of investors, which is pushing the top 100 polluting companies to align their business strategies with the Paris Agreement.