A burgeoning responsible investment sector must do the impossible.
Tasked with ensuring the private sector is contributing to solving the environmental and social challenges facing our modern society — the “to solving” is doing a lot of heavy lifting in that sentence — it must also quantify and make these contributions tangible.
More than ever is riding on this “proof” that a corporation is worthy of its customers, investors and staff. This is due to a growing societal awareness of the private sector’s contributions to complex challenges, including climate change, reconciliation, modern slavery and structural sexism.
Yet measuring the environmental and social impact of a business is tricky work. Investment portfolios navigate countless reporting and benchmarking frameworks, spit out metrics and set targets in the hope of quantifying impact.
In seeking to quantify the impact of their investments, funds can be guilty of losing sight of the bigger picture: prioritising short-term carbon-reduction targets, while forgetting about the broader impact of climate change. In performing an acknowledgement of country yet ignoring the legacy of colonialism and ingrained racism, funds risk forgetting why they’ve been entrusted with members’ retirement savings in the first instance.
Holistic impact measurement — what all funds should be striving for — should focus an investment’s long-term purpose. Impact is then measured against this purpose, comparing a fund not with other investment vehicles, but against a standard and purpose it has defined for itself.
And what is that purpose? Beyond “making lots of money”, a singular value must be at the core — the heart — of a business, driving the direction that investors can trust in.
Measuring impact by first defining purpose
Measuring impact in a holistic sense starts by asking a simple question: Why are we doing this?
What is the purpose of this fund, this portfolio, this asset?
The obvious answer is returns. But using Socratic questioning to delve one level deeper, we can unlock something more substantive. Investors — in the case of pension funds, and the same is ostensibly true for others — want higher returns so they may pass on as much money as possible to the members who have entrusted them with their savings.
Again, we ask, why?
So that members have enough money to retire in prosperity, with economic and social security. So that all members, irrespective of class and privilege, will have equal and affordable access to housing, healthcare, medicine, transport, education and leisure, not only for themselves, but for their children, too.
Funds are investing for their members’ futures. That is the purpose, the “why”.
Measuring impact in a holistic sense starts by asking a simple question: Why are we
doing this?
“Why” vs “what”
“What do we want?”
“Lots of money!”
“Why do we want it?”
“To live healthy and sustainable lives with equitable access to healthcare, employment and education for ourselves and our children!”
Not much of a chant. And not one you’ll hear at many rallies, let alone within boardrooms. Rather, it’s indicative of an idea that has the power to shift the way we measure impact, by focusing on the “why” of investment, rather than the “what.”
Money is a powerful “what”, and we have many ways to measure it. Financial performance is tracked through investment performance; annual returns; profit margins; gross profit; leverage; 3-, 5- and 10-year net returns; dividends; total fees; insurance costs; cashflow; and comparisons against a plethora of benchmarks and indexes, seemingly constructed to confuse more than help. All disclosed quarterly, and always cut in a way that paints the prettiest picture of the investor in question, leaving no doubt that this is the market-leading fund most worthy of growing your savings.
Yet when all the focus is on this “what”, the “why” can become a secondary concern. Instead of describing how an investment is enabling a healthier society, annual and quarterly reports focus on annual and quarterly financial performance.
It is ironic those deemed most fiscally responsible and wise have become short-sighted — prioritising returns to members today, despite the knowledge that money may be worth less in the unequitable world of tomorrow.
Returns of equivalent, or potentially less, value that support projects and businesses creating a more equitable future will be better for members in the long run. What is an extra 10 percent cash when a retiree inherits their pension in a world where future essentials, such as medicine, hospital care, rent, transport, etc, cost 25 percent more than they ought to?
Can the “why” be answered in a way that doesn’t focus on a “what” of lots of money?
Or, more practically, how do we avoid the temptation to prioritise short-term financial measurements, and how do we then refocus on the “why”, returning to the purpose of an investment?
This is a phenomenally difficult question to answer and, surely, there are no perfect solutions. But let’s consider this question through the narrow lens of action on climate change within the real estate industry.
The “why” in real estate
We should, once again, query why more real estate owners and managers set net-zero emissions targets, seeking to quantify and then eliminate the carbon footprints of their portfolios.
It’s likely due to the growing social awareness that the built environment is responsible for 40 percent of global emissions, leading investors and members to initially demand, and now expect, property owners to act.
That’s important because it acknowledges all stakeholders have a role to play in the preservation of our climate. That preserving intergenerational equity is the domain of all members — in both the private and public sectors — of a functioning society.
That is the noble purpose behind asset owners’ commitments to mitigating climate change.
So, having defined the purpose, what does it mean — within this slim context — to measure impact?
A purpose fostered around intergenerational equity, by definition, will take generations to measure and, thus, is a long-term target. Short-term impact metrics can be used, provided they are consistent with that purpose.
Crucial within this is an awareness these short-term impact metrics can and should be different across different portfolios and assets. Although present-day thinking criticises inconsistent application of impact measurements, owners and managers should not be perturbed by exercising different metrics in pursuit of a consistent, overarching, long-term purpose.
Employing a range of metrics merely acknowledges, within this specific context of climate-change mitigation, different assets will achieve net-zero ambitions differently. This echoes the structure
of the Paris Agreement’s bottom-up approach to nationally determined contributions, and there’s no reason why this can’t be adapted to impact measurement within the property sector.
A new corporate office tower, for example, will be incredibly energy and water efficient, with minimal operational carbon, likely earning top ratings and rankings. But the embodied carbon — emissions associated with materials and construction — will dwarf those of the 30-year-old office building next door, which may never realise similar operational efficiencies on account of old plans and design, but that has a proud track record of incremental gains and tenant buy-in along that journey.
The key here is neither of these is necessarily better than the other, and comparing them may do more harm than good relative to the broader purpose. Portfolios should and will be constructed of both assets. The key point is, using the same metrics to map towards a climate-change goal will unintentionally punish one, positioning it as a laggard when this shouldn’t be the case.
And this doesn’t even take into consideration assets in other classes, sectors or even jurisdictions, where differences in environmental, political, regulatory and social factors can make it much easier, or harder, to drive down emissions.
So, how should we measure the impact of a Sydney office tower relative to a Miami mall or an Indian industrial site?
Finding “whats” for our “why”
The answer is, we shouldn’t. Rather than comparing assets and portfolios, a drive towards holistic impact should be achieved on an asset basis, with the only comparison being relative to the asset metrics 12 months previously.
If appropriately incentivised and directed, asset managers can ask, “What can be done here, within this specific context, to achieve the heralded purpose?”
This requires trust and integrity. Trust built through a long-term track record evincing a commitment to a long-term purpose. Trust among investors, managers, tenants and staff that the commitment is legitimate and backed by a well-reasoned “why”.
Trust that cannot be earned through stop-gap measures, such as buying millions of dollars’ worth of carbon offsets or cleverly answering benchmarking questions in such a way that a high score props up an inactive portfolio.
Long-term trust in long-term impact driven by long-term purpose — that is holistic impact measurement.