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Measuring the societal impacts of investment funds

As the importance of societal and environmental factors continues to grow, asset managers need to find ways to measure and report on the impact of their investment funds to their clients and wider stakeholders.

Asset managers handle billions of dollars in investments on behalf of institutional investors, pension funds and individual savers. The financial performance of these investments is, and always will be, critically important — but at the same time, a growing consciousness of social and environmental factors is shifting the game. Institutional investors need insight into the ‘non-financial’ impacts of their investments for two main reasons: they need to be able to assess the robustness of their funds to a world experiencing such things as climate change, degradation of nature and material resource scarcity; and they increasingly need to respond to questions about the real-world impact of their investments from stakeholders.

Amid growing public interest, the emergence of social and environmental investment risks has not gone unnoticed by regulators. Asset managers and financial services businesses across the spectrum have to take account of a growing body of ESG integration and reporting requirements through measures such as the Taskforce on Climate-related Disclosures (TCFD), IORP II (pension regulation), the EU taxonomy of sustainable economic activities, and the Network for Greening the Financial System led by central banks and supervisors.

There has been a dramatic galvanization amongst the global community to take more action, faster, to mitigate against a potential worsening of climate change.

A growing set of risks

Although minds are rightly concentrating on controlling COVID-19 at present, climate change and climate-related risks will become top of mind again when the outbreak is over — the growing prevalence of extreme weather events around the world make the issue visible and real for many people, and this will continue. There has been a dramatic galvanization amongst the global community to take more action, faster, to mitigate against a potential worsening of climate change.

But it is not only about climate — other megatrends are vitally important too and influence decision making within the financial sector. Issues such as human rights, biodiversity loss and plastic waste — all of these translate into both challenges and opportunities for investors to evaluate.

The challenge for asset managers

Due to COVID-19, we have quickly been confronted worldwide with our own vulnerability. Furthermore we must realize more than ever that we have greatly exceeded the earth’s carrying capacity on a global scale. This emphasizes the importance to promote sustainability and to ensure that people, the environment and the economy are rebalanced in a sustainable world. The financial sector plays a key role in this. Measuring the impact of investment decisions is essential in order to properly interpret the role of the sector in the transition to a sustainable economy.

In response, the financial sector is stepping out of its historically passive role and embracing the concepts of sustainable finance in a more active and comprehensive way. ESG policies and commitments are becoming increasingly embedded into investment approaches and decision making, along with improved sustainable investment reporting.

For asset managers, it is a real challenge to measure and quantify the environmental and social impacts of their investments at a fund level. It is one thing to assess the impact of a specific stock, but when there are perhaps 200 stocks comprising a fund, creating an accurate picture is complex. Across many criteria there is a lack of relevant data and it remains extremely difficult to make judgements on a comparable basis between different investments.

CISL solution to assess fund performance

Fortunately a solution is at hand. The University of Cambridge Institute for Sustainability Leadership (CISL), in conjunction with its Investment Leaders Group (ILG), has developed a framework — the Investment Impact Framework — for assessing portfolios of listed equities or corporate bonds.

The framework is based on the United Nations 17 Sustainable Development Goals (SDGs), grouping them into six themes, three environmental (climate stability, healthy ecosystems, resource security) and three social (basic needs, wellbeing, and decent work).

Combining information on the six impact themes

Assessing relative fund performance

Based on data that are widely available from recognized data providers, the framework assesses the absolute performance of a fund as well as its relative performance in comparison to a benchmark. It does this across all six themes and provides a color-coded score for each one, enabling the asset manager or owner to understand and assess the performance of a fund and compare it to others. It is suitable for any fund, not just those claiming to be ‘ESG’ or green.

To briefly summarize the six key themes in the CISL framework, they look at the following criteria:

  1. Climate stability: the global effort to curb the Earth’s temperature rise, and an asset’s alignment with the Paris consensus to hold temperature rises ‘well below’ 2°C.
  2. Healthy ecosystems: the maintenance of ecologically sound landscapes and seas for people and nature.
  3. Resource security: the preservation of natural resources through efficient and circular use.
  4. Basic needs: the provision of critical services to all in society, including low-income people to help them escape poverty.
  5. Wellbeing: enhanced health, education, justice, and equality of opportunity for all.
  6. Decent work: the creation of secure, socially-inclusive jobs and working conditions for all.
This article is featured in Frontiers in Finance – Purpose or profit? Why not both.

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A significant step — with more to do

The framework recognizes that this is only the beginning. There is a gap today between what can be measured and what we would ideally like to measure if improved data were available. For example, the ideal measure of climate stability might be the alignment of an asset to future warming scenarios based on consumption of ‘global carbon budget’. But at present, the measurement is made based simply on total greenhouse gas (GHG) emissions. An ideal measure of decent work would take into account numbers of employees, working conditions, pay and contract types across the whole value chain, but in reality the only data that exists today at scale is number of full time equivalent (FTE) workers.

That said the framework is a significant step in the right direction — an early opportunity to get started with impact measurement on what will be a continuing journey to develop the framework as more granular and robust data becomes available.

The framework has been well received by many significant fund managers, including the organizations making up the ILG, the a global network of pension funds, insurers and asset managers committed to advancing the practice of responsible investment in collaboration with CISL.

Moving the framework online

At present the framework in its current form requires a fairly significant investment of time and effort by asset managers to generate results as it requires entering portfolio information into spreadsheets.

At KPMG, we quickly saw the high value and potential of the framework and reached out to CISL with an offer to help move the framework online. Based on our extensive benchmarking research, we believe it to be to be highly suitable for assessing investments at a fund level.

Given this, we are delighted to have begun working with CISL to help develop an online tool through which the framework can be applied. Our collaboration with CISL is being led by Dutch sustainable finance specialists from the KPMG Climate Change and Sustainability services network, with input from KPMG colleagues globally.

The initiative will mean that, in the near future, asset managers will be able to access an online portal, enter their investment fund code, and then pull off an instant report showing them the status of their investments. It will be available for fund managers globally to access. 

The ultimate goal for the online tool is to make it much easier and quicker for asset managers to use the CISL framework, which should help increase the number of institutions adopting it. That way, the framework could become an important milestone towards a common standard across the industry.

With so much resting on asset managers being able to report on ESG performance, our hope is that the CISL framework, powered by the online tool we are developing, will empower stakeholders through the investment value chain to channel capital into more sustainable funds.

In light of the COVID-19 outbreak, measuring the impact of investment decisions has become even more essential in order to properly interpret the role of the sector in the transition to a sustainable economy.

Investment Leaders Group

The Investment Leaders Group (ILG) is a global network of pension funds, insurers and asset managers committed to advancing the practice of responsible investment. It is a voluntary initiative, driven by its members, facilitated by the Cambridge Institute for Sustainability Leadership (CISL), and supported by academics from the University of Cambridge..

The ILG´s vision is an investment chain in which economic, social and environmental sustainability are delivered as an outcome of the investment process as investors go about generating robust, long-term returns