In today’s world, the financial and sustainability performance of organisations are two sides of the same coin. Increasingly, sustainability considerations play a key role in capital allocation and investment decision-making, and ‘responsible investment’ has reached the mainstream.
And yet, there is no common understanding of what responsible investment means, or a unified approach for integrating sustainability considerations into investment decision-making.
‘What one person may think is responsible, others may think is not’
A new report from ACCA in collaboration with the Universities of Witwatersrand and Leeds, Understanding responsible investment, addresses this gap in understanding. Following a thorough review of a wide range of resources, including academic research, industry standards and professional texts, the report sets out the eight core components of responsible investment, creating a framework that provides consistency for investment practitioners, asset owners and regulators.
The framework allows organisations, and their investors, to map how the organisation’s financial success is linked to environmental and social considerations. The components are interconnected, and a responsible investor will consider them holistically – the report illustrates how this might be done in practice.
The report stresses that this framework is not exhaustive and is not intended to relegate financial returns to a secondary consideration, ‘but rather to ensure that the full spectrum of risks and opportunities is systematically incorporated into investment analysis and capital allocation’.
It adds that given the dynamic nature of responsible investment, the framework should be seen as a foundation rather than a static blueprint.
Investor’s view
The report is accompanied by a further publication that sets out the perspectives of responsible investors from across the world and their reaction to the proposed framework.
The investment professionals who participated in the roundtable sessions that informed this report made the point that the current ambiguity around responsible investment has profound implications in practice. As one noted, the term itself is highly subjective: ‘One of the big challenges is that what one person may think is responsible, others may think is not.’
‘Sometimes you only need very few indicators to assess a company’
While the investors welcomed the framework and the work to bring some consistency to the discipline, they emphasised that there is no one-size fits-all solution to sustainability reporting.
‘Many ESG metrics are intangible in nature,’ said one. ‘The true value lies in the interpretation of the data. It’s my job to understand the company and its culture. It’s not always what a company says, but how it says it.’
Disclosure overload
A major concern for investors is the sheer volume of sustainability information produced by organisations. Some complained that organisations attempt to address every one of the UN’s 17 Sustainable Development Goals, whether they are relevant or not.
‘We definitely suffer from ESG disclosure overload,’ said one participant, while another added that there was a risk that ESG ‘will become a quasi-reporting function rather than an investment function.’
As a result, many are selective about what they use: ‘ESG reporting will always be useful for people other than investors of course, but from an investor perspective, sometimes you only need very few indicators to assess a company.’
The investors recommended that organisations should focus on what is material for them, an approach reinforced by the Corporate Sustainability Reporting Directive (CSRD): ‘ESG reporting often fell down because people thought they have to do everything.
‘Instead, it’s about looking at the three or four things where there is material impact – where you can move the dial and make a difference – and focusing on that.’
Factoring in factors such as climate risk into company valuations would be a valuable next step
Some investors went further, arguing that factoring in the impact of factors such as climate risk into company valuations – by integrating CSRD data into discounted cashflow valuations, for example – would be a valuable next step.
‘That would be full ESG integration for me,’ said one. ‘It would change the way that investors look at prices. If capital markets started to pay for the integrated value and not just for the financial value, that would be a very, very big change.’
The discussions informed a series of recommendations for organisations, investors and policy makers, and it is ACCA’s aim that this framework will be used widely by boards, their advisers and those responsible for investing.
