Over the past month, there have been plenty of articles about ‘the way forward’ after COVID-19. Fortunately, developing a way forward using sustainable investing started much earlier. Over the past few years, several Dutch asset managers have developed their own criteria to qualify Sustainable Development Investments (SDIs) that prioritise solutions for societal and environmental challenges. Annebeth Roor researches SDG investing for the Erasmus Platform for Sustainable Value Creation at RSM. She did interviews at MN amongst others to gain a more detailed perspectives on the SDI approach, and describes what she found in this blog.

Three steps, two challenges

To identify challenges and outline next steps for SDI methods, I interviewed people at Dutch financial service provider MN, and at two of its clients Pensioenfonds Metaal en Techniek (PMT) and pension provider PME Pensioenfonds. For additional perspective, I also interviewed two other large Dutch pension fund asset managers; APG (for government and education employees), and co-operative pension investor PGGM. The information I gathered has resulted in a research paper entitled SDI Optimization. In it, I propose an integrated approach as the way to go – and indicated three steps and two challenges that asset managers face when adopting these steps. This is my contribution to the way forward.  

An integrated approach   

When using the SDIs in investment decisions, the SDIs are used as strategic information. The findings of my research indicate that the more integrated the SDI approach, the more confident investors are in using it. For a start, the SDI approach highlights the importance of understanding the business model’s ability to deliver financial profit as well as understanding its contribution to, or impact on, societal and environmental objectives. Investors can gauge the value it creates and analyse a business’ actual and potential environmental and societal outputs and outcomes – as well as its financial returns. This integrated analysis can be implemented for each asset class; each has its own characteristics of ownership and information position.

Three steps

My research identified three steps that can lead towards a more integrated approach. The first step is to incorporate any negative contributions to the UN’s Sustainable Development Goals (SDGs). As the current methodology only measures positive contributions, is how to achieve a balanced understanding of how a company either contributes to solutions to societal or environmental challenges, or how it detracts from them.

A second step is to integrate the need for investments in certain sectors and/or countries. The SDGs are 17 broad goals which is a strength but also a weakness. Identifying in which sectors and/or countries investments are most needed ensures that the investments are done there where most needed.

A third step relates to the integration of the SDI approach into investment analyses to increase the company’s integrated understanding of its potential for value creation, and thus indicate where it can make its contribution to the SDGs.

Two challenges

There are two challenges faced by investors such as MN when taking the three steps. The first relates to institutional investor’s portfolio characteristics, in particular those of pension fund asset managers.

Some geographical areas and sectors need more investments than others if the SDGs are to be achieved. According to some pension funds’ portfolio characteristics, a large number of investments are by definition not in the countries that according to the SDGs are in greatest need because of the risk-return profiles of pension funds’ investment portfolios; pension funds have already incorporated their requirements for risk-return profiles in their definitions of SDIs. There are, however, reasons to look more broadly than these risk-return metrics would allow, and to integrate societal and environmental information in investment analyses. This could, in turn, increase the ability of pension funds to invest in those countries and sectors most in need.

The second challenge relates to the practical feasibility of having the comprehensive objective of an integrated approach to investments. Imagine a continuum with feasibility at one end and comprehensiveness at the other. Moving towards a more integrated approach – for example by including negative contributions – makes the approach more comprehensive, but might come at the expense of feasibility in daily investment practice. However, opting for feasibility without moving towards a more integrated approach won’t accelerate the development of reliable impact data in the long term. For businesses, financial institutions and governments, attaining an integrated approach is therefore a double-edged challenge. And as impact data improves over time, a more comprehensive approach could also become more feasible for all of them.

Feasible ánd ideal metrics

The development of reliable impact data in the long term can be fostered by combining feasible and ideal metrics and by developing transparent metrics. Feasible metrics concern information that is currently available and used in SDI approaches. Ideal metrics are the metrics that investors would ideally measure. They relate to outcome or impact metrics which show the contribution to or impact on environmental and societal objectives.

Combining these two allows investors to use an approach that follows what’s feasible at the moment (even though it’s suboptimal for sustainability) while striving for more ideal metrics. This acknowledges that working with limited information is inherent to the investors’ profession and indicates what information investors would like to see companies report. When investors are more transparent about which ideal metrics they want, then companies can provide them.

Although the SDGs’ common language is well received, their broad set of goals and sub-goals means that impact is reported in diverse ways. If investors disclose their current metrics and their ideal metrics, then everyone can debate which ideal metrics are best to use. This works for listed equity and credits and for other asset categories such as private equity and real estate.

My research showed that providing transparent metrics and welcoming a shared debate would foster reliable and comparable impact data, and would ultimately light the way for sustainable investing to become mainstream.

More information

This is one in an occasional series of blog posts from the Erasmus Platform for Sustainable Value Creation at Erasmus University. If you enjoyed reading it and would like to know more about the work of our research centre, then sign up for our email newsletter.

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Platform for Sustainable Value Creation blog