Ronald van Genderen of Morningstar speaks at the Alfi Impact Investing Conference, in Kirchberg, on 26 April 2017. Photo: ALFI
Over €41trn is invested globally in regulated open-ended funds. If more of this went toward environmentally and socially sustainable products this could make a huge difference. But how to measure and thus market sustainability?
It’s fair to say international financial companies have a mixed reputation. Thus providing opportunities for environmentally and socially responsible investment would help to motivate new investors, particularly idealistic youth, as well as inspiring traditional clients.
Even for those clients driven by hard financial returns, there is increasing acceptance that climate change is increasing risks for investors, particular over the long-term.
However, it is hard enough to define ethical behavior, let alone measure it. A panel at the 26 April ALFI Impact Investing Conference reviewed some of the options, but as many questions were raised as were answered. Commercially available measurements are better than nothing, but there are few easy, complete answers.
It is increasingly understood that climate change is adding to risk for corporates but also for countries. Hence the financial information company Morningstar has developed an augmented sovereign risk rating. To traditional metrics such as economic performance, public debt and deficit, 20% of the score is influenced by climate, energy and natural resources considerations.
“We found that introducing this element can reduce the long-term credit worthiness of high income countries by as much as 3%, while low and medium income countries can receive a 7% boost,” explained Ronald van Genderen, manager research analyst with Morningstar.
Jean-Florent Helfre of S&P Trucost speaks at the Alfi Impact Investing Conference, in Kirchberg, on 26 April 2017. Photo: ALFI
Jean-Florent Helfre, head of business development with S&P Trucost said his firm analyses companies financial and production data to extrapolate an estimate of their environmental impact. Even for straight reporting of companies’ carbon data reporting, he said investors could be confident that 80% of firms report this accurately.
Huub van der Riet of NN Investment Partners speaks at the Alfi Impact Investing Conference, in Kirchberg, on 26 April 2017. Photo: ALFI
Whilst welcoming efforts such as these, Huub van der Riet, lead portfolio manager impact investing with NN Investment Partners, said there is no substitute for making their own investigations.
“You have to engage and this is very important to gain a better feel for the environmental, social and governance stance of a business,” he stated at the Association of the Luxembourg Fund Industry conference. Again, “engagement” is difficult to standardise and measure.
Nancy Saich of the European Investment Bank speaks at the Alfi Impact Investing Conference, in Kirchberg, on 26 April 2017. Photo: ALFI
Nancy Saich, senior technical adviser environment, climate & social office at the European Investment Bank recognises the challenges, and also said that so far they have taken a case-by-case approach when assessing the stance of new and existing investment projects.
“We are working with other multilateral investors, sharing some impact reporting, but it is hard to see that there can be a single overall portfolio indicator,” she said. They are also working on social impact metrics, but if environmental and climate related factors are hard to develop, issues such as gender equality are harder still.