As the debate of growth versus degrowth rages on, we are in the middle of either a trillion-dollar opportunity, or a very costly, dystopian future.
Last year, a paper by ShareAction on Growth Narratives said to enable truly sustainable investment would mean anchoring asset prices in externally defined ecological thresholds, such as the Stockholm Resilience Center’s nine Planetary Boundaries, and foundational social needs, as envisaged by economist Kate Raworth’s ‘safe and just operating space for humanity’.
The report identified a series of steps investors should take, such as:
- ensuring that externally defined social and ecological thresholds are at the heart of corporate and investor sustainability efforts and reporting,
- coming to terms with longer-time horizons and lower financial returns, and
- partnering with public finance, which may be best placed to incentivise private investment towards public good.
To its point, can we then assign the reason for the gargantuan climate financing gap that still exists as partly due to unreasonable financial return objectives? If so, it’s high time we accept that not everything can have a strong return, at least not financially.
The evidence of asset owners’ willingness to pay for impact is mixed, however. While it is commonly acknowledged that offering impact comes at a cost, and research has shown that investors may be willing to accept lower returns from impact vehicles, other studies suggests investors’ valuation of externalities is not linear, meaning they do not pay significantly more for more impact, even when it increased by a factor of 10.
This suggests that the demand for sustainable investments is currently driven by positive feelings associated with the investment choice, rather than a calculative valuation of impact.
A nudge in the right direction
What would it then take to set a sustainable course? Well, in order to deliver on desired outcomes, we’d have to acknowledge that initiatives need to be technologically feasible, provide sufficient economic incentives and have a stable policy environment, otherwise they will not materialise at the speed or scale needed.
To avoid current scope insensitivity in outcomes-based investments, while ensuring momentum continues, we need standardised frameworks of measurement. Thus, policy advocacy should play an important role in investors’ stewardship strategies. A couple of platforms to keep track of, and get involved with, are the works of the Principles for Responsible Investment (PRI) and others on “investing for sustainability impact” (IFSI), and that of the Impact Management Platform.
Highlighting the former, you may be aware of the excellent (but long) background analysis performed. Commissioned by the PRI, UNEP FI, and the Generation Foundation, the report found no single or simple answer to the question of how far IFSI is legally required or permitted across the 11 jurisdictions covered.
The authors did note, however, that investors are likely to have a legal obligation to consider sustainability impact goals if deemed instrumental to financial return objectives, or to pursue it as a distinct goal and parallel objective.
Therefore, in order to provide the appropriate regulatory framework, the current focus on disclosure regulations need to be accompanied by complementary developments in the areas of investors’ duties and processes.
For example, by stating that pursuing sustainability impact goals is an option investors should consider alongside financial risk/return.
This would see current expectations falling short even in progressive countries like Sweden, where currently the mandate for the national pension funds is only to ensure asset management is performed in an “exemplary manner” through responsible investing.
Simply following the herd and not taking full responsibility over your “sphere of influence” isn’t cutting it anymore. We need innovative thinking, bold action and true accountability to dig ourselves out of this hole before it gets flooded.
