Institutional investors shift ESG focus from exclusions to outcomes
The world’s largest asset owner sustainable investment platform, which was co-founded by AustralianSuper, is shifting its measurement framework to increase the focus on the real-world impact that companies have on the environment and social issues, rather than the policies they espouse or their own estimates.
The move will better connect information about company revenues – the focus of the platform’s data collection efforts – with real world outcomes contributing to the advancement of, or retreat from, the UN’s sustainable development goals (SDGs), James Leaton, head of research at the Sustainable Development Investment Asset Owner Platform (SDI AOP), whose asset owner members collectively account for $1.5 trillion AUM, told AsianInvestor.
SDI AOP
UN SDGs are employed as a benchmark against which to judge the sustainability of an investment.
REVENUES REFLECT OUTCOMES
“We’re working to get more quantitative data concerning the geography of which markets a company is serving, and how far revenues translate into, for example, the actual production numbers of a drug that is improving health, or the generation of renewable energy, or the number of students in education. You need to understand the relationship between a revenue line and tangible outcome, so you can get a clear picture of impact,” he said.
Hans Op’t Veld, chair of the markets and members committee of SDI AOP, another co-founder of the AOP, said the move was initiated in response to demands from investors, including those in APAC, to have better data on this element of their portfolios.
He is also principal director for responsible investments at PGGM Investments, the investment manager for the €277 billion Dutch pension fund.
“This new project we are working on will extend the revenue alignment information that we have to include outputs and outcomes, which helps to understand the tangible contributions of companies, both in terms of the products and services rendered as well as to where these are ending up geographically,” he said.
He said the platform hoped to make the first results of the new initiative available to investors before the middle of this year.
Efforts by those in the Asia Pacific to improved measurements around sustainability follow high profile crackdowns on greenwashing by Australia’s Securities and Investments Commission (ASIC).
The regulator in August 2023 sued Active Super, the A$14 billion ($8.6 billion) Australian super fund, for allegedly misleading stakeholders regarding its ethical and responsible investment claims, the latest in a series of actions against asset owners and asset managers.
Geri McMahon, climate change and sustainability partner at KPMG Australia, said the challenge of accurate impact measurement was particularly pronounced for private market investments in regions with less developed regulation/reporting requirements, including some developing markets in Asia.
She pointed to significant variation in regulatory requirements in different investment regions, adding that currently the most pressing for asset owners when it comes to environmental impact was the setting of net zero targets, transition modelling, and climate change scenario analysis.
KPMG Australia
“This can then further inform their sustainability and climate change strategy,” she said.
IMPACT OVER EXCLUSION
The approach reflects a shift among many investors towards a more direct impact-based approach and away from exclusions and ESG monitoring, to improve the sustainability of their portfolios.
Daan Spaargaren, head of responsible investment at the €50bn Dutch pension fund ABP, last year in an interview with AsianInvestor criticised the limits of using traditional ESG ratings frameworks to build sustainable portfolios, and said the fund was preparing a more impact-based approach.
“With traditional ESG scores, sectors like mining, which in social and environmental terms are poor, but have a high governance score, have a very good chance of being included in an ESG portfolio. That is strange and unwanted,” he said at the time.