How could we measure impact or, better said, how should we?

06/11/2018

• Including measures of engagement and intentionality would enhance ‘Impact’ gauges • Improved reporting and transparency, the rise of more data sources and the standardisation of measurement methodologies will spur progress

Responsible Investing (RI) and the integration of environmental, social, and governance (ESG) factors into the investment process have entered the mainstream investment arena. The focus has now progressed to assessing the actual impact companies are making on society and the environment.

While measuring this impact remains a challenge for analysts, improved reporting and transparency, the rise of more data sources and the standardisation of measurement methodologies will lead to progress in the next few years. Measures of fund rankings on Sustainability and Impact would also be significantly enhanced if they also included the key elements of ‘engagement’ and ‘intentionality’, according to NN Investment Partners (NN IP).

The integration of ESG considerations into investment processes is becoming increasingly mainstream. In recent years the focus has moved from ESG integration to adding Impact to the equation as well. The most widely accepted reference point for understanding ‘Impact’ are the United nations’ 17 Sustainable Development Goals (SDGs). The SDGs have sharpened the focus on the non-financial impact of investments and aim to end poverty, protect the environment for future generations and promote prosperity for all.

Established measures of impact include carbon and water footprints, which measure the CO2 that a company generates and the intensity of its water consumption. Impact measurements also include ‘social’ yardsticks, such as the number of people who are given access to financial services or healthcare. The total, weighted footprint of an investment portfolio could then also be compared with a similarly-calculated figure for a benchmark. For example, the financed CO2 emissions of our European Sustainable Equity portfolio are 38,197 tonnes per annum, versus 205,966 for the MSCI Europe Index, based on its assets under management of EUR 323 mln.[1] The comparative figures for the financed waste are 3,483 and 108,007 tonnes respectively. The difference in financed CO2 emissions equate to the annual emissions of 7,456 households as shown in the figure below.

Measuring the impact of investments comes loaded with challenges related to the availability and integrity of data and the lack of methodology standards. The inclusion of two key elements for rating funds on Sustainability – engagement and intentionality - would also be beneficial, Jeroen Bos, Head of Equities at NN Investment Partners, believes.

‘Engagement’ refers to asset owners using their ownership position to actively stimulate companies into improving their impact on society and/or the environment. For example, improving a company’s carbon footprint, its water usage or social impact. Academic evidence has shown such engagement and resulting improvements should make a company more attractive and its business model more sustainable, benefiting investors through improved financial performance and valuation.

‘Intentionality’ assesses the extent to which companies plan to do good in the future through their products and solutions and through the way they operate within society. The right intentionality helps the sustainability of a company’s longer-term business model.

Jeroen Bos comments: “Measuring the positive impact made by companies remains a challenge at present for the sector and will likely generate much debate in the market going forward, prompted by asset owners, regulators and non-governmental organisations. Despite the challenges it remains important that we, as a sector, continue to take next steps and stimulate further improvements in this field.

“Improved reporting and transparency, the rise of more data sources and the standardisation of measurement methodologies will no doubt lead to substantial progress on this issue in the next few years.

“For investors, engagement and executing on our duties as owners of the companies in which we invest can create a win-win for our clients’ investment portfolios and for broader society.”

More transparency around the positive impacts that companies are having has several implications for portfolio managers. For example, by measuring the CO2 emissions or water consumption of a company, they can gauge how efficiently it is dealing with these costs. Treating the environment well by reducing emissions or using less water can improve a company’s profile among consumers and having lower emissions can also make it less vulnerable to future increases in carbon pricing and taxes.

[1] NNIP, ISS Ethix Climate Solutions, Milieu Centraal emissions average household and Surostat. All figures as of 30/09/18

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About the author

Jeroen Bos

Jeroen Bos

Head of Equity Specialties

Experience since 1999

Business Experience

2015-to date Jeroen is Head of the Specialized Equity investments team of NN Investment Partners. Next to that Jeroen is a Member of the Management Team Investments.

2011-2015 Head of Global Equity Research at ING IM, heading a team of 25 experienced buy-side analysts covering global equities

2009-2011 Head of Industrials & Materials Team Europe at ING IM

2008-2009 Industrials Sector Portfolio Manager at ING IM

2006-2008 Director at the Technology Equity Research Team at UBS, New York

2004-2006 Vice President at JPMorgan in London

1999-2004 Senior Equity Analyst at MeesPierson/Fortis in Amsterdam

Qualifications

CAIA

CMA

CFA

MSc in Financial and Business Economics from the Vrije Universiteit in Amsterdam in 2000

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