Sustainability indicators: the time that investors look in the mirror

  • Investors look for sustainability and non-traditional measures from the companies they invest in, but what if they hold themselves accountable in the same way?
  • By focusing the sustainability objective inward, the fund will be able to better anticipate and adapt to new risks and opportunities in the years to come.
  • From people and the planet to governance, there are four crucial areas that investors can analyze to provide a clearer picture of the sustainability profile of their capital.

This article is taken from a series of blogs written by members of the Global Future Council on Investing exploring the factors shaping the 2040 investment portfolio.

You can deepen the topics discussed in this article by reading our community newspaper.

In recent years, investor demand for “non-traditional” or “stakeholder” measures has led companies to disclose a wealth of new information beyond traditional financial statements. Investor and corporate communities increasingly agree that long-term performance and stakeholder strategies are closely linked.

The way companies manage their people, use the planet’s resources, and affect the communities around them are all long-term success factors. “What gets measured gets managed” goes the old saying and the business world is moving towards measuring what matters

Investors today are generally the users rather than the producers of this non-traditional information. Most institutional investors seek information on sustainability issues to better assess the adaptability and resilience of companies and monitor their risk management to inform investment decision making and votes. Investors want to get to the heart of what really motivates companies over time.

This begs the question: Shouldn’t investors be looking at the same issues in their own organizations and portfolios? Couldn’t investors benefit from a similar valuation?

As investors seek sustainability and other non-traditional metrics from the companies they invest in, major asset owners are increasingly recognizing the benefits of similar accountability. By focusing the sustainability objective inward, the fund will be able to better anticipate and adapt to new risks and opportunities in the years to come. The potential impact is huge: our analysis shows that globally, assets under management of public pension funds and sovereign wealth funds alone increased from $ 31 trillion to $ 53 trillion between 2009 and 2018. In such a vast and growing space, the sustainability of investor metrics are becoming critical.

Global analysis of OECD and IFSWF data

Global analysis of OECD and IFSWF data

Image: FCLTGlobal

For asset owners who have yet to assess their own sustainability practices, measuring several critical areas of interest will be an important first step. This can provide a core set of analysis that could be included alongside more traditional investment reports and give investment committees, boards of directors and in some cases grantees a clearer view of the profile. sustainability of their capital. Organized around the four categories of corporate indicators of the World Economic Forum and drawing on metrics and standards organizations (such as GRI, SASB and TCFD) as well as the work of FCLTGlobal, here are some examples of indicators. and disclosures relevant to an asset owner and his portfolio:

  • Principles of governance: It is essential to start with the fund’s investment objective and timeframe, but many investors lose sight of these overall objectives. A reminder that starting there can help an investor maintain this long term focus over time. Clarity on engagement with companies – how investors actively engage with the managers / companies they invest in on an ongoing basis to ensure they are serving all stakeholders – will also help this.
  • Planet: It is essential for asset owners to make clear commitments to net zero portfolios and the way forward to achieve them. Many investors also own significant real estate assets directly, so it is important to consider biodiversity issues in this portfolio. Finally, recognizing how the portfolio is allocated among assets that incorporate ESG factors, are sustainability oriented, or selected or invested to have an impact provides a holistic picture of a portfolio’s sustainability profile;
  • People: Large asset owners are organizations in their own right, not just portfolios. Taking into account the principles of diversity and inclusion, pay equity and asset owner compensation is important for investors and businesses alike;
  • Prosperity: The success of a fund against its stated objective over the relevant period is the ultimate measure of success for an asset owner. One way to achieve superior long-term performance is to consider the percentage of assets that have mandates or investment contracts that exhibit long-term success and drive engagement with owned companies.

The desire of investors for further measures is undeniable. Today, we see major asset owners turning this demand inward to help themselves better anticipate emerging risks and opportunities. By focusing on these four crucial areas, asset owners can incorporate forward-looking information into a thoughtful look at themselves, which better prepares them to generate sustainable returns over the life of the investment that are aligned with their goal.