A paradigm shift is taking place in the role of Sustainability and Impact, around the world. This shift has placed Sustainability not only well into the public domain but, importantly, at the core of investment and capital allocation decisions. It also has an unintended consequence – it enables us to innovate at scale. Let’s look at this shift more closely…
In a recent post, we looked into Larry Fink’s Letter to CEOs in 2021, recognising that organisations are making significant strides in incorporating sustainability thinking into their organisations. We recognised that a single-minded focus on shareholder value can lead us to the wrong outcomes.
Our work shows time and again that profits are in no way inconsistent with purpose—in fact, profits and purpose are inextricably linked and hence Business owners, communities and the environment can participate as a collective and not as competitors. This is, in essence, the simple and powerful premise of impact investing.
But to bring sustainability into the core, two shifts are required:
- The best organisations have undergone a paradigm shift, in how they think about Strategy and Sustainability. From viewing Sustainability as a cost, often referred to as “Doing well by doing good”, they have shifted to seeing its potential as a performance driver. These are no mere words. These organisations use an adaptive strategy process, within which signals from the environment continually feed and trigger the testing of assumptions, challenging perspectives and give rise to a portfolio of strategic options, in which sustainability is at the core of value creation.
- These organisations do not only think differently. They have built a measurement system which integrates impact into capital allocation and investment decisions. They can do this because they can measure their impact, along the investment life-cycle and therefore can make conscious choices of how best to internalise and reduce unwanted impacts, while amplifying positive ones, in a credible way.
At the heart of this ability to measure – openly, credibly and with partners, is an Impact Measurement tool. This tool, meshed directly with the United Nations (UN) Sustainable Development Goals (SDGs), assists Executives, Boards and Investors to better understand the alignment of their portfolios with SDGs, not loosely linked by broad commitments or subjective measures , but rather by a testable investment thesis, that can demonstrate how their investment decisions generate value, in a sustainable manner.
We have chosen to measure Investment outcomes across four pillars:
- Capital Contribution: placing higher weight on growth capital than replacement capital, as we found it offers greater impact.
- Impact of investment activities on SDGs: This is moderated by the operating performance of the investment over time. Put otherwise, good ideas that are badly managed would translate into a lower impact rating.
- Impact of People and Places: This is where the location and context of investment decisions matter, such as the country in which the investment is made, the locality within that country and the end-user benefiting from the investment, be they consumers, micro enterprises or large entities. Many nuances must be accounted for in making these assumptions, but we must start somewhere to get from “adjective” to “measured impact”.
- Lastly, the Financial Impact: Simply put, an asset that cannot cover its cost of capital fails a primary requirement of impact in that it is not sustainable. It cannot be a performance driver, rather a way of “doing good”.
This measurement system links directly to the organisation’s strategy and growth aspirations. It is portable, capable of measuring the future impact of investment decisions on sustainability and desired impact across different sectors, industries and (importantly) borders.
It equips management teams to go beyond sentiment – to better manage their portfolio companies and people; and more effectively demonstrate the impact of investments to shareholders, policymakers, funders and the societies in which they invest.
Aptly put by Phillip Hildebrand, co-Chairman of BlackRock, “We have entered a new investment order. The Covid-19 pandemic has accelerated profound shifts in how economies and societies operate across four dimensions: sustainability, inequality, geopolitics and policy support. We believe this calls for a fundamental rethink of investment portfolios – starting now.”
Have a good weekend everyone!
Saar Ben-Attar (Chief Instigator) & Adrian Saville (Head of Strategy & Economics in Emerging Markets)