Impact positioned alongside risk and return
Asset owners and asset managers are thinking afresh about the impacts of their investee companies and other assets. What responsibility, if any, resides with owners and managers for these impacts, and how should they account for such impacts? These issues are connected to the asset owner’s “license to operate,” which is edging toward having regard to wider stakeholder interests.
- To investors for whom investment impacts matter, the impacts will need to be placed in a guiding context, such as the UN Sustainable Development Goals (SDGs; see UN 2015). These goals are quickly becoming a widely accepted version of what national governments and society broadly see as desirable states to work toward. They also define the shape of a sustainable development investment framework that some funds seek to adopt. The focus is on investing in opportunities that meet financial risk and return requirements and support the generation of positive social and/or environmental impact aligned with the SDGs.
- In a world facing shortages of resources, damage to the environment, social fissures, and geopolitical strife, corporations and their owners increasingly consider how to operate in a way that is congruent with sustainable development.
- In most cases, those taking this investing path try to achieve impact goals as a collateral benefit with subsidiarity to maximizing risk-adjusted return. In this narrative, however, some asset managers and asset owners move toward frameworks in which impacts and financial outcomes are managed as a weighted pair.
- Accounting for and reporting on impacts must address the interpretation of soft data, which are often the only data type that can be accessed. That is, ESG issues are not generally of the hard data type and so are derived from approximations and proxy measures subject to interpretation and qualifications. Better investment frameworks and expanded data sets are key to effective practice in the next 5–10 years. In particular, stronger processes are needed to deal with the soft data challenge.
- In this narrative, quantitative and qualitative data disclosures are sourced through initiatives such as the Sustainable Accounting Standards Board, Taskforce for Climate-Related Financial Disclosures, and <Integrated Reporting>. These developments also stem from pressure in the value chain, particularly from the big asset owners that seek more data to attribute among agents as a means of fulfilling their overall responsibilities and accountabilities.