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How to Measure Sustainable Investment?

measuring sustainable investments for a better world

Sustainable Investment has been growing in popularity as climate change has become an increasingly important global issue.  More than a quarter of assets under management are currently being invested around the world with ESG (environmental, social, governance) factors taken into consideration.  

In 2006, the United Nations supported the Principles for Responsible Investment, which accelerated sustainable investment growth.  Signatories of PRI promise to invest with the following principles in consideration:

Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.

Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.

Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest.

Principle 4: We will promote acceptance and implementation of the Principles within the investment industry.

Principle 5: We will work together to enhance our effectiveness in implementing the Principles.

Principle 6: We will each report on our activities and progress towards implementing the Principles.

But how do we measure the success of these investments?  

Several financial institutions are developing scores and strategies to help investors score the “greenness” of their investments.  There is a wide range of tools and guidelines out there on sustainability standards, but none currently have a widely accepted standard. 

ESG investment means something different to different investors.  Individuals and institutions also value different aspects of what is broadly known as sustainable investment.  Below are a few of the different scores or standards available.  

The Sustainability Accounting Standards Board Foundation

“The Sustainability Accounting Standards Board Foundation (SASB) is an independent, nonprofit standard-setting organization that develops and maintains robust reporting standards that enable businesses around the world to identify, manage and communicate financially-material sustainability information to their investors (Global Newswire).”  SASB has standards for 77 different industries.  Their standards are robust and well-developed, but not to a point where the score alone is enough; manual research is still required.

The Green Evaluation 

In 2017, S&P Global Ratings launched the Green Evaluation.  The Green Evaluation is “an asset-level environmental credential which builds upon today’s existing frameworks of governance and transparency and considers approaches for climate resilience and environmental impact (S&P).”

The Green Evaluation creates a score (based out of 100) based on three separated categories: the transparency, governance, and either the mitigation or the adaptive impact of a project.  The score can be used for investors to compare the sustainability or “greenness” or a project.  

Risk Atlas

S&P Global Ratings has also created Risk Atlas, a tool that includes a sector risk and a country risk.  The sector risk analyzes environmental and social risk including land and water use, manufacturing footprint and packaging.  The social risk includes human capital and safety management.  Oil & gas and metals & mining are the most exposed sectors while asset managers and business services are the least exposed sectors (The National).  

Morgan Stanley’s Impact Quotient

Morgan Stanley’s Impact Quotient or “IQ” allows users to prioritize and select over 100 social and environmental preferences.  (Morgan Stanley)  The tool then utilizes several third party data sources to analyze and align the users investments with their impact preferences.  It then offers suggestions to asset managers for investments that better align with their preferences.  

It’s difficult to measure sustainability. Transformation is working to develop widely accepted sustainability standards, but defining what is considered sustainable is something that is still up for debate among financial institutions, companies, and everyday citizens.  As we begin to settle on a standard, what is most important now is transparency.  Reporting transparency allows individuals and institutions to form their own opinions on what is acceptable and what is not.

June 10, 2020

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