Nathan Fabian, Director of Policy and Research, PRI kicked-off a discussion on the question: Is all investing impact investing, or is impact investing a special category that needs different reporting tools?
Speakers: Jessica Fries (Board Member, IIRC and Executive Chairman, The Prince’s Accounting for Sustainability Project (A4S)), Marek Grabowski (Board Member, International Auditing and Assurance Standards Board and Director of Audit Policy, Financial Reporting Council), Farha-Joyce Haboucha (Managing Director, Director of Sustainability & Impact Investing, Rockefeller & Co.), Tessa Hebb (Director, Carleton Centre for Community Innovation, Carleton University), David Wood (Director, Initiative for Responsible Investment, Hauser Initiative for Civil Society, Harvard Kennedy School)
Tessa Hebb defined impact investing as the investor acting with the aim of achieving positive social or environmental outcomes as well as a financial return, but Fabian asked how important it is to distinguish between the intention of the investor and the achievability and measurability of that intent. Hebb said a key issue here is what timeframe should be used to measure these impacts, as some benefits could take a lifetime to come through.
“Results must be measurable and, therefore, must be measured - therein lies the challenge for the sector.”
Joyce Haboucha said that all investment has a pronounced effect on society, because all business practices invariably have an impact on society.
“All investing is impact investing, in that some produce positive social and economic outcomes, some less so.”
Having a genuine integrated story
Jessica Fries said that there had been a huge take-up of integrated reporting, with more than 800 companies in the International Integrated Reporting Council (IIRC). However, many firms still need to analyse how they can integrate ESG into their strategy and put numbers to the implications for the business, so are a long way from being able to communicate details effectively to investors.
Fries said that CFOs felt that there wasn’t enough demand for ESG information from investors; she said that while investors are doing a lot of detailed research into ESG, it isn’t being given enough prominence at quarterly meetings or analyst roadshows.
Fabian said that if we rely on the signals we’ve always taken for expressing demand, such as company meetings, which are often dysfunctional (from a long term value perspective), there’s a chance we’re going to miss the demand altogether.
He asked whether the anxiety exhibited by many CEOs in discussing ESG with the market was a generational issue or a confidence issue?
“The minute sustainability comes up, the mainstream guys get their phones out and start checking emails. SRI analysts want to ask questions but they ask them after the meeting rather than in the main meeting itself. Companies need to take responsibility and raise these issues but they also need confidence in their internal evidence.”
Fabian said that, surely, companies are responsible for their own narrative to the market? Fries agreed, saying that the A4S research showed that companies must start by improving their own communications: in order to communicate more effectively with their investors, companies need to identify and measure some of the impacts, risks and opportunities that they are facing, and they first have to convince their internal communities.
“If you’re saying something is strategically vital, are you measuring your KPIs based on those issues? Have you actually got some measure that links into remuneration? Is that really over the long term? It’s fairly easy to unpick if you haven’t genuinely got an integrated story to tell.”
The emergence of metrics
Fabian asked what impact investing can teach us about new metrics for measuring impact.
Hebb said that the metric for impact investment has been too small, and that to roll impact investing out beyond high net worth individuals or foundations to the huge funds, the metrics would need to be more robust.
“As impact investment moves into larger asset classes, we’ll see the emergence of some metrics through integrated reporting – understanding the power of the narrative as well as the numbers.”
Demand for standardised assurance?
Hebb noted the beginning of convergence between metrics and assurance, citing the example of green bonds, which have experienced exponential growth over three years. They attracted US$5bn without metrics, and are now estimated at $50 billion, but with investors now wanting comparability, Cicero has introduced both metrics and assurance.
Fabian asked, given investors are looking for comparability, how is the audit and assurance profession addressing emerging trends?
Marek Grabowski said that corporate reporting is currently in a period of disruption created by changing societal expectations about the impact that companies have on society.
“In financial reporting, the world is pretty stable. Audit practitioners know what investors are concerned about and they can test for those things. In non-financial reporting, where there is some disruption now, it’s much harder to see a single norm today.”
He said that a range of different frameworks, including integrated reporting, are being explored, and that investors definitely want comparability, which is primarily established in the reporting framework and tested through assurance.
“The demand for assurance in the nonfinancial reporting space will likely evolve as non-financial reporting matures, but there are still a number of issues to be worked out.”
David Wood asked if previous studies’ findings were true that the demand for assurance is not from investors but from corporate social responsibility representatives within companies, to give themselves credibility with their peers.
Grabowski said that even if the demand is coming from within the company to back up external reporting, there must be a focus on communication to the end user in delivering assurance.
“If the assurance doesn’t meet the expectation of those end users, just like if the audit of financial statements doesn’t, then it won’t be of much use to anybody.”
David Wood said that the responsible investment community is caught wrestling with the fundamental tensions between adopting the conventions of financial practice and critiquing and trying to change those same conventions.
Wood said that there are many systemic issues remaining, citing tax avoidance as an example.
“At a portfolio level, saving money on taxes in your corporations is probably not a terrible idea if what you’re trying to do is make money, but at a systemic level, depriving the public sector of the resources it needs to make a just and sustainable world is odious.”
When asked how the panel saw the development of the impact investment market, Hebb said that government policy will have to be involved, as the impact is often the generation of good for all of society, and government is the way of capturing that return.
Fries said that at a roundtable of CIOs and asset management heads, all participants said that they wanted to get rid of quarterly reporting, and the European Commission is moving in that direction. However, analysts still demand quarterly reports.
“From a company’s perspective, it’s hard to move alone, without your peers moving. And it’s all well and good if you’re performing well, but if you’re not, how do you make sure you’re aligning market expectations? And if the market is moving in one direction and reality in another, how can you align the two? It is possible to move away from quarterly reporting, but not quite as easy as it might seem.”
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RI Quarterly vol. 8: Highlights from PRI In Person 2015
RI Quarterly vol. 8: Highlights from PRI In Person 2015
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Is all investing impact investing?