Aligning the capital markets more directly with the urgent needs we face as a society to halt environmental destruction and reverse decades of worsening inequality must be our priority for 2018. Alignment needs to occur at every level, across the global markets.
Despite the tremendous efforts behind the Paris Climate Accord, formalization of the United Nations Sustainable Development Goals and a long history of other efforts to change the course of climate change and inequality, we are not making nearly the progress needed. The 1,700 signatories to the United Nations Principles for Responsible Investment, which represent $70 trillion of assets and a wave of press about environmental, social and governance-oriented investing, have not gotten us on track. Even another documentary by Al Gore has not done the trick.
It is essential that we develop the tools to strengthen our investment system, getting much more capital moving away from laggard companies into companies that can drive positive change, and to make systemic changes to raise the bar for all companies. This is especially important now because the responsible and impact investment movement is being joined by massive mainstream investment firms, and the largest banks in the world are entering this business. If the tools are inadequate, we will all be gravely disappointed and the responsible and impact investing movement will fail. However, we also have an excellent opportunity to strengthen the tools and the system as we are joined by the mainstream.
Tool Number One: Data and Transparency
We need to develop information systems that allow company management, consumers, regulators, the public and investors to have insight into the social and environmental impacts that companies are creating. Various efforts are underway to create tools that are helpful in this regard and can be leveraged to translate global norms into a framework that can be used to measure how responsibly businesses are operating.
Calvert recently completed a case study with this goal in mind, linking the Sustainability Accounting Standards Board (SASB) materiality matrix with the United Nations Sustainable Development Goals (SDGs). SASB has developed a materiality-focused approach that aligns well with the investment research approach of Calvert, emphasizing sustainability issues that we believe will most impact a company’s financial performance over the long term. The SDGs provide a similar, parallel framework for nation-states and national programming, which emphasize key development goals, the achievement of which is necessary to reach sustained, equitable, economic growth and prosperity for all citizens.
Calvert’s mapping exercise identified common themes between SASB Standards and the UN SDGs. This involved matching each of SASB’s disclosure topics on financially material ESG issues and related accounting metrics, across SASB-defined sectors and industries, with the SDGs and related targets. We found that a substantial portion – 71 percent – of SASB metrics map to the SDGs and their related targets, which helps us to identify industries in which the SDGs are most likely to be financially material. This enables us to see a clearer path to investments most likely to achieve the SDGs and related positive societal outcomes, as well as those that may be better positioned to generate positive financial outcomes.
In addition, initial assessment finds that 66 percent of SASB accounting metrics could be mapped, with varying degrees of exactness (ranging from “proxy” to “exact match”), to ESG data vendor indicators. This insight brings to light the information gap that exists between an evolving corporate disclosure environment and traditional investor resources. It also highlights that, as the web of disclosure requirements and standards for corporations grows larger and more complex, finding commonalities between these standards can benefit companies and stakeholders by distilling what is most relevant and material. You can read the full study on www.calvert.com
In addition to these efforts, company managements need to develop internal reporting tools in order to provide information that their teams can use, and investors and all other stakeholders can see, in order to drive change. These tools need to tie the specific sustainability efforts to financial impacts at the company.
The resulting information needs to be made transparent for two major reasons. First, we need to know if we have priced carbon, water, pollution and various social impacts properly; understanding the financial impacts within companies is critical to building this understanding. Second, investors and consumers need to see these relationships in order to properly price stocks and bonds, and to understand the total costs of products. For instance, if one company uses materials grown in ways that destroy the rain forest, and another company uses sustainable raw materials, we need to know the economic impact and adjust prices to prevent the first company from reaping profits at the expense of the environment and society. Otherwise, this situation will persist and we will never make real progress.
All the current efforts related to sustainability reporting are voluntary, and are not tied together in any coordinated manner. We need to coalesce around a set of standards and drive the development of information management systems to create the relevant data. In 2018, the Sustainability Accounting Standards Board’s standards will be formalized and we really need companies to get started using them.
Responsible investors also need this information in order to drive impactful corporate engagement. We need to spend more of our engagement time pressing for change, as opposed to asking for disclosure.
Tool Number Two: Impact Reporting
As we strengthen our information systems, we will be able to provide impact reporting to multiple parties. In order to achieve the changes we need to address inequality and climate risk, we need people to understand the impact of their product purchase decisions, employees to understand the impact of their day-to-day business decisions, boards to have information to properly oversee management’s sustainability effort, investors be able to differentiate the quality and financial materiality of competitive companies’ sustainability efforts, and regulators and the public to hold companies accountable for their impacts. The entire system needs to tie together, just like our current financial reporting system connects.
You should be able to understand that one product you purchase has a different set of social and environmental impacts than another product, as well as the difference in the price tag. And investors should be able to see that their portfolio has a specific set of environmental and social impacts relative to a benchmark, as well as at the individual company holding level. Only when we create this type of transparency and information flow can we hope to drive the changes needed.
I believe that if investors are provided with information about the amount of toxic pollution, greenhouse gas emissions, adverse health impacts and death, human rights abuses, severe controversies, and other social and environmental impacts of their investments, many more investors will be motivated to change their portfolios. The same holds true with consumers; if your credit card or bank statement shows the contribution to social and environmental impact, you likely will begin to make different choices.
We’re still at the early stages, but once impact reporting gets started, the logical result is that investors will start to ask more questions. Shining a little bit of light will make people more eager to know the whole story, and the amount of disclosure and transparency will continue to increase. This should also have a positive effect on shareholder engagement. Armed with a complete information system, it will be much easier for engagement teams to ask for real change. And increased transparency and reporting will likely encourage more concrete and positive outcomes. The more people know what to look for, and the easier it is to measure progress, the more likely we will be able to influence the changes we need.
David MacKay, who wrote “Sustainable Energy Without the Hot Air” in 2008 to draw early attention to a potential fossil-free energy system, said, “If everyone does a little, we’ll achieve only a little.” We are long past the stage where a little bit of Responsible Investing can help protect the environment and society along with our clients’ investment dollars. Instead, the coming year will see our clients demand that we do a lot, and provide them with data that proves we are performing as we promise. With better data and transparency, and more developed impact metrics, we can help accelerate the rate of progress, which is essential on every level.
Article by John Streur, president and chief executive officer for Calvert Research and Management, a wholly owned subsidiary of Eaton Vance Management specializing in responsible and sustainable investing across global capital markets. John is also president and a trustee of the Calvert Funds as well as a director of the Calvert Foundation and member of its Risk Management Committee. He guided the creation of the Calvert Principles for Responsible Investment, the Calvert Research System and the Calvert Indices, and has placed focus on investment research and emphasis on environmental, social and governance (ESG) factors integrated with investment decisions. He joined Calvert Research and Management in 2016.
John began his career in the investment management industry in 1987. Before joining Calvert Research and Management, he was president and chief executive officer with Calvert Investments. He has managed socially responsible investments at the request of institutional clients, including public funds, religious institutions, and college and university endowments since 1991. Previously, he was president, director and principal of Portfolio 21, a boutique firm specializing in global environmental investing, and spent 20 years at AMG Funds (and its predecessors), a firm he co-founded and where he served as president, CEO and chair of the Investment Committee.
John is a Founding Member of the Investor Advisory Group of the Sustainability Accounting Standards Board and serves as a director on the board of the Environmental Media Association, whose mission it is to motivate the entertainment industry to educate the public about environmental issues and sustainability through all forms of media. He is a member of the FMC Corporation Sustainability Advisory Council.
John earned a B.S. from the University of Wisconsin, College of Agriculture and Life Sciences.
The views expressed are those of John Streur and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Calvert disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Calvert are based on many factors, may not be relied upon as an indication of trading intent. Past performance is no guarantee of future results.
Calvert Research and Management is registered as an investment adviser with the U.S. Securities Exchange Commission.