Global, 6 October 2020.
Research by the Thinking Ahead Institute warns institutional investors they risk a disconnect between ambition and reality if they focus on measuring investment impact without explicitly linking it to value creation for stakeholders.
In a research report from its sustainability impact working group* – entitled Sustainability: understanding impact and value creation – the Institute warns that investment organisations need to be wary of the gap between their positive intentions for a more sustainable economy and their ability to deliver it.
Marisa Hall, co-head of the Thinking Ahead Institute, said: “Most investors tend to focus on the measurement of their impact but stop short when translating this into an evidence-based narrative that clearly explains how these sustainability metrics translate into value and outcomes for each stakeholder. Critically this should also include future expectations that can inform investors’ deployment and stewardship of capital.”
To help bridge this gap the working group devised a scorecard to monitor value creation activities across a range of stakeholder groups and a four-step self-assessment framework to identify areas of desired improvement:
1. Identify who the key stakeholders are and understand their expectations and needs in order to determine what is valued
2. Align organisational purpose with the desired outcomes by understanding which stakeholders the organisation prioritises
3. Identify gaps between current practice and desired norms that align with the organisation’s beliefs and value systems, evaluating these systematically through tools such as questionnaires and scoring systems
4. Openly discuss the results and gaps to develop an internal action plan.
As a fifth step, the working group recommend that the output of this impact and value creation assessment should be communicated externally.
Marisa Hall said: “Historically articulation by the investment industry of value creation linked to purpose and impact has been poor. But this is changing as stakeholders increasingly expect authentic, intentional and transparent communication of the value they can expect now and prospectively. While challenging, we believe this can be achieved by using the Integrated reporting framework or, in practice, producing an Integrated report.
“Investment has long been seen as a two-dimensional problem of optimising risk and return. In reality it’s always been three-dimensional: investment also impacts the world around us. We believe managing impact improves risk and return outcomes, therefore using this framework will help investment organisations address all three together and effectively communicate their overall value added.”
*The sustainability impact working group comprised representatives from: AXA Investment Managers, Coronation Fund Managers, Dimensional Fund Advisors, the International business of Federated Hermes, First State Super, QIC and Willis Towers Watson.
The Thinking Ahead Institute was established in January 2015 and is a global not-for-profit investment research and innovation member group made up of engaged institutional asset owners and service providers committed to mobilising capital for a sustainable future. It has over 40 members around the world and is an outgrowth of the Willis Towers Watson Investments’ Thinking Ahead Group which was set up in 2002.