The Dutch pension asset manager PGGM, is seeking to push the frontiers of impact management by developing a new methodology in cooperation with UBS Asset Management, and researchers from the City University of New York (CUNY) and Harvard University. This seeks to measure impacts of sustainable investing.
A rough outline of its approach was published in Science Magazine in February, and details have not yet been disclosed. But the framework’s focus on product impacts, scalability and science is of most interest to Piet Klop, senior adviser on responsible investment at PGGM.
Ultimately, he explains, PGGM hopes to be able to compare companies on impact per euro invested. When achieved, this could be a game changer for sustainable development; investors could then allocate investments towards companies creating both a high positive impact and a high return.
A number of hurdles have to be overcome first. Methodolgies need to be standardised, and data quality and comparability need to be assured.
Charles Vörösmarty, founding director of the Environmental Sciences Initiative at the Advanced Science Research Center at CUNY, says science helps here, bringing transparency and traceability into the current disorderly range of approaches. Vörösmarty is heading the research group together with John Spengler, a professor at the Harvard TH Chan School of Public Health.
To establish comparable results, the science-based framework approximates the environmental or social impact of companies and is fed with reproducible and external data sets on, for example: earth observation and modelling, epidemiology, public health, nutrition science, demographic mapping, and life-cycle analysis of resource production and consumption.
Context-based metrics – looking at outputs (such as emissions reduced), outcomes (such as ambient air pollution improvement) and impacts (such as lives extended) – are linking corporate manufacturing activities, products, and services to environmental and human beneficiaries, and are driving the new methodology.
Vörösmarty says context could arise when looking at an industrial facility, and what the benefits would be for people and ecosystems arising from a particular change.
He says: “For example, using renewable energy supplies to replace a large coal-fired power plant in India is going to make a much larger difference in terms of pollution reduction and positive human health impact than the same deployment of renewables in a place like Scandinavia where the air is pretty clean to begin with. “That’s why we need the geospatial data sets, so that we [can] put all this into context.”
Company level data is fundamentally needed to measure the impact of companies, but is lacking. Much of the required data is unavailable or inaccessible, as it is competitive and proprietary information that companies do not publicly report.
To deal with this difficulty, two research groups are working complementarily, using the same impact metrics but different approaches, and testing them on parts of a public equity portfolio of €2.5bn.
One group has a top-down, science-based approach and calculates a company’s impact from revenue income. The second has a bottom-up approach and obtains impact data directly from company reports or through engagement work. The bottom-up data works as a reality check, through which inaccuracies and gaps that result from the top-down assessment are rectified. Given the lack of data quality, calibrating the models by using real-life company data is needed.
Dirk-Jan Verzuu, investment director, impact investing, at PGGM, explains: “Take Kingspan, a buildings materials company from Ireland, and compare it with [two] other companies [in the sector]. All three have revenue data that is categorised as insulation material, but Kingspan makes high-performance insulation materials, Rockwool makes stone wool and Saint Gobain makes glass wool, which means that each of them has very different efficiency metrics. They also sell in different markets. The bottom-up numbers help to refine the models, make them better, and your top-down calculation becomes more exact.”
Measuring impact becomes a repeat process of measuring, refining and remodelling to approach the accurate impact value gradually over time. The methodology measures tangibles, such as tonnes of CO2 avoided, litres of water saved or numbers of lives extended. Quantifying tangibles is valuable for investors when communicating with clients, beneficiaries, NGOs and the public, and it is also vital to avoid green-washing of Sustainable Development Goal (SDG) investments, says Klop.
How fast impact measurement will develop depends, among other variables, on whether corporate, finance and science communities will cooperate. Vörösmarty says that a “culture of sharing data” and a “level of trust” need to be established. Yet Verzuu is optimistic: “We see a number of companies getting enthusiastic about generating impact data. Companies are getting interested because they know more and more [impact] investors want to have this data. [.…] Companies benefit from long-term relationships with long-term access to the capital market.”
In its Impact Management Project, a further initiative, PGGM has mapped its entire €218bn portfolio according to its impact goals of ‘avoiding harm’, ‘benefiting people and the planet’ and ‘contributing to solutions’.
The results of this initiative are that impact is material for 50% of investments by asset value; for 28% it engages actively; 8% of invested capital grows new or undersupplied capital markets; and for the remaining 12% the type of impact cannot be defined. It also notes, that such mapping could help other investors to increase the benefit for people and the environment, and contribute to ‘solutions’.
As of today, PGGM’s impact mapping efforts do not change the strategic asset allocation. Rather, it allows PGGM to articulate where it is making a positive impact, and where data is lacking to evaluate this.
Generally speaking, Klop says that PGGM cannot maximise impact at the expense of financial return as it is bound by fiduciary constraints. He explains: “It is impact at market-rate returns. Is it maximum impact at market-rate returns? Maybe one day we will get there, but that’s not how we operate right now. All we are doing at the moment, and that is difficult and ambitious enough, is to account for the impact that our investments make.”
Regardless of this, investing in sustainable solutions is seen as a driver of market-rate return. PGGM’s main client, the PFZW pension fund, has already invested €12bn in the SDG themes of climate change and pollution, food security, healthcare and water scarcity, and plans to invest a further €8bn by 2020. Klop concludes: “We hope that by leading this effort more investors see that one thing doesn’t have to exclude the other. You can have a market-rate return with impact.”
This article was originally published by IPE.