Over the past decade, a growing number of investors have taken an interest in how their capital affects the real economy, the physical world, and society. Some people want to go further than just understanding the effects; they want to use their power as investors to affect positive, measurable change.
Consequently, asset managers and asset owners are reporting on investor impact, both as an intentional objective and an unintended consequence. A primary way of doing this is through impact reports.
Communicating the real-world impact of investments is a difficult task for numerous reasons. One challenge is how to fairly represent the investor’s contribution to outcomes. The root of the problem lies in the fact that an investor is usually but one of many contributors to a real-world outcome, so it’s difficult to show direct causality.
Consider a project that installs solar panels on a building. Assume the building owner is the buyer, the solar panels are made by a manufacturer, the system is installed by a contractor, and the project is financed by an investor. Who gets the credit for the greenhouse gas reduction? Can the investor ethically claim credit?
Some people assert that the investor could claim credit if the outcome would not have happened if it were not for the investor. The problem with this logic is that it is unprovable. The investor did, in fact, fund the project, and so one has no way of knowing what would have happened if the investor had not funded the project. Thus, we must pursue another avenue.
In Taking Credit, a study published in the Journal of Business Ethics, authors Graham and Cooper posit that a claim of credit is ethical when it is justified and defensible—that is, when “the credit matches the contribution to the work activity and is worthy of approbation by civil society.”
The authors argued claims of credit that exceed one’s contribution are unjustified because they deprive someone else of the credit to which they are entitled. In addition, taking an appropriate level of “credit” for a morally reprehensible act is indefensible because the act itself is unethical, and thus, not worthy of praise but rather of condemnation.
The criteria proposed by Graham and Cooper can be used to evaluate claims of credit in impact reports, and we’ll use them to examine one stylized example of how impact is commonly represented by asset managers and asset owners in the reports they provide to investors and beneficiaries.
Impact reports often use infographics to emphasize quantitative measures of real-world impact. Examples include “50,000 tons of carbon savings, one million MWh of renewable energy generated, and 400 jobs retained”. Collectively, these measures are labelled or described as “our impact” or “portfolio impact”.
This presentation of impact seems to imply that the positive outcomes “belong” to either the manager or the investors. This is problematic because neither the manager, nor the portfolio, nor the end investors directly saved carbon, generated renewable energy, or retained jobs. Those outcomes were directly created by the investees and indirectly by countless other contributors. Investors, however, can take full and legitimate credit for financing such endeavours. Because impact reports typically are not specific about the extent or nature of the financing contributed, claims of credit can be difficult to evaluate and can appear to be unjustified.
Digging deeper, one often finds that the financing by the investor was a routine decision, commensurate with market rates and the risk profile of the investee. In other words, it was business as usual. In addition, one may find that the linkages between the investee and the highlighted outcome are tenuous, and there were negative outcomes that were not acknowledged in the report. These facts don’t make the claim of credit unethical or indefensible, but these facts would likely make the claims less worthy of praise to many people.
For those creating impact reports, wisdom can be found in the general advice given to individuals when taking credit for shared results in the workplace:
- Be specific about your contribution.
- Avoid exaggeration.
- Acknowledge other contributors.
- Provide context and balance.
- Don’t take credit if you’re not willing to take blame.
The aim of this analysis is not to find fault or deter asset owners and asset managers from reporting on impacts. Rather, it is to improve the quality and clarity of communications about the impact of investments.
