Sustainable investing — considering ESG factors and/or improving investees’ sustainability performance — is on the rise. Between 2018-2020, sustainable investments in the US, Canada, Europe, Japan and Australasia grew 15% to $35.3 trillion. Companies are increasingly making sustainable investments to achieve their own sustainability goals and enhance their reputations. 44% of institutional investors view it as an opportunity for higher returns, reports KPMG, but it’s unclear they are getting them.
Despite the booming market, many investors aren’t following standard best practices. This includes reporting how much they’re investing, setting impact goals, and tracking progress. These shortcomings cost investors opportunities to advance their own sustainability agendas and maximise positive impact.
Only a handful of the world’s largest asset managers received an A grade or above for their sustainable investment approach, according to ShareAction. The charity, which promotes responsible investing, assessed sustainable investing by 77 of the world’s largest asset managers by looking at five areas: policies and practices related to governance and stewardship, climate, biodiversity, and social issues. The study found that most firms failed to implement reasonable investing standards. More than a third of asset managers — accounting for half of the total assets under management — scored a bottom D or E grade, with consistently poor approaches in all five areas.
Still, some investors are taking mindful approaches.
- L’Oréal set clear 2030 goals for its €50 million Fund for Nature Regeneration, including restoring 1 million hectares of degraded ecosystems, capturing 15-20 million metric tonnes of CO2 emissions, and creating hundreds of new jobs. These goals focus the fund on generating high-priority outcomes and, through public disclosure, ensure accountability.
- Apple tracks and reports all impacts of its $400 million carbon removal fund. The company uses remote sensing technology to measure and verify emissions reductions of nature-based projects. Apple aims to reach its net-zero target through the fund, and this technology allows it to monitor progress and ensures investments meet their goals. Reporting impact demonstrates Apple’s transparency and boosts its reputation. The company removed 167,000 metric tonnes of carbon through the Chyulu Hills forest restoration project in Kenya.
- Microsoft’s venture capital (VC) arm M12 prioritises investments in women-run businesses. Its $6 million Female Founders Competition funds women entrepreneurs building technology solutions and software. The company is investing in an often untapped opportunity, as female entrepreneurs lead businesses that, when VC funded, perform at least as well as VC-backed companies run by men. Even still, only 3% of VC-funded companies in the US have female leaders. BCG found that women-led businesses deliver more than twice as much revenue per dollar invested than those led by men.
- Private markets investor Bridges Fund Management sticks to a clear impact-driven investment strategy and selects investee companies that match its larger portfolio goals. It aims to achieve net zero over its entire portfolio by 2040, while delivering impact over the four themes of sustainable planet, healthier lives, future skills, and stronger communities. This focusses Bridges’ investments on driving impacts relevant to the company’s vision, and ongoing performance assessments allow it to track progress across the portfolio.
- Global investment firm AllianceBernstein (AB) actively engages with investees through direct dialogue, knowledge sharing and partnerships with wider investor networks to encourage them to improve their sustainability performance, such as reducing environmental impact or preventing human rights issues. By initiating dialogue with South Africa’s state-owned electric utility company Eskom, responsible for 40% of the country’s carbon emissions, AB and others influenced it to reduce its carbon emissions. Eskom announced in 2021 that it will cut 30% of its coal power plant capacity by 2031.
With the soaring number of investments labelled sustainable and growing scrutiny of both definitions and impacts, those already active in the market must take note of emerging good practice. A consistent approach to setting goals, tracking and reporting outcomes will help investors avoid overclaiming their investment impacts — in other words, impact washing.
