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According to Morningstar ESG-focused “sustainable funds" saw net inflows of more than $10 billion in capital during the second quarter of 2020. This brings the year-to-date inflow into ESG investing funds to $20.9 billion. The full-year record in 2019 was $21.4 billion so ESG-focused funds are projected to beat the record by year-end, which shows the future promise of socially conscious investing.
Despite the rise in ESG investing, there is yet to be a standardized set of reporting requirements defined. That not only makes it difficult to hold accountability when it comes to corporate governance, but it also makes ranking difficult to quantify or validate. To date, ESG rubrics have been more qualitative than quantitative, which also means investors cannot improve their investment’s impact without measuring it.
In our latest whitepaper, we offer investors a framework on how to ensure their investment impact is aligned with their intentions. Below is a brief synopsis
First, set goals and priorities. An investor’s priorities and goals should reflect the corporation’s set of values, objectives for shareholder value creation, style of investing, and corporate governance. In this initial stage, investors should focus on their true intentions and motivations. By defining values, an investor can set concrete social and environmental goals and objectives for their investments. For instance, Aneuvia’s ESG strategy is focused on investing in companies that align ESG factors with their long-term corporate strategy.
Second, lay the groundwork for impact assessment and measurement. Conduct “fact-finding” activities to build a solid picture of the company’s performance. Research competitors by gathering evidence on how a company is performing relative to others in the same category. Competitive analysis can be a key leverage point for influence. Investors can also narrow down tangible ESG or impact investment themes by relying on external rating agencies - a valuable source of impact measurement frameworks and data.
Third, measure and monitor the impact of investments regularly. Impact measurement allows investors to monitor progress towards objectives and identify improvement areas. A variety of impact measurement frameworks and standards have emerged in the past decade. Among many, the SDGs, Impact Reporting and Investment Standards (IRIS+), Impact Management Project (IMP), Global Reporting (GRI), and Sustainability Accounting Standards Board (SASB) frameworks are widely used. As mentioned before, due to a lack of standardization, data might not be comparable, complete, or available. Despite this, setting beliefs and policies, prioritizing objectives, allocating resources, and preparing to interact can create progressive change.
From ESG disclosure standards, company data, scorecards, and rankings to reports created by investment data providers and sustainability practitioners, investors can rely on a range of data sources to inform their understanding of ESG issues and corporate performance.
It’s become very easy for companies to merely associate with causes. Whether it’s posting a black square on Instagram in support of Black Lives Matter or creating a branded hashtag in support of climate change, cause marketing - the idea of supporting a cause - doesn’t necessarily suggest impactful activism, which is more about actively contributing to positive outcomes. Ultimately, businesses often talk ‘purpose’ without following through with action, and this is labeled as “impact washing,” “greenwashing,” or “slacktivism.”
The cost and backlash of ‘purpose hypocrisy’ are greatest to those who fail to acknowledge it. Today’s consumers are paying more attention to how brands respond in times of crisis. 46% of consumers report paying more attention to brand communications than they did pre-COVID. And silence comes with a price: 56% of consumers say they have no respect for businesses that remain silent on important issues (Edelman Trust Barometer).
This begs the question, “How can investors assess which investments are impactful enough?” In our latest whitepaper, we discuss the power of transparency to mitigate the possibility of “impact washing.’ The following four factors are key in helping investors decide whether their public equity investments are impactful enough:
- Intentionality: Frame the problem that you are solving for and demonstrate an intention to generate positive social or environmental impact through investments.
- Additionality: Seek to produce beneficial social or environmental outcomes that would not occur if not for the investment. Be consistent - and don’t capitalize on ‘moments in time’ - to demonstrate ongoing value.
- Active ownership: Engage with investee companies to improve ESG or impact-related disclosures, mitigate negative impact, and drive positive impact in communities through activism.
- Impact measurement: Commit to measuring progress and report regularly on social and environmental performance of impact investments.
The opportunity is bigger now than ever before, particularly as people look to businesses to create positive change. However, it is equally important that companies take action on the issues that they stand for, as opposed to the slacktivism of proclaiming mere association. The world is waking up to hypocrisy by calling out such companies and investors who claim purpose, but lack action. So, as investors, it’s important to signal the difference between trust and transparency.