Impact Voices | February 10, 2022

Building beyond an ESG baseline to invest with an impact lens

Amit Bouri
Guest Author

Amit Bouri

Barely two months into this new year, concerning echoes of 2021 are already showing up in 2022. The ongoing pandemic disruption remains top-of-mind for hundreds of millions globally. Meanwhile, geopolitical tensions are bubbling anew, and world financial markets are disquietingly unsteady.

These most urgent concerns are limiting our ability to focus on longer-term crises, like the climate emergency and the crisis of global inequality. To top it all off, a deep crisis of trust now pervades in many corners of society. 

Some describe this moment as a global “poly-crisis.” Whatever you call it, our world is in trouble. 

In this turbulent context, financial capital is flooding into “sustainable” investments. Global ESG assets – that is, investments that include some consideration of environmental, social, and governance factors – are on pace to exceed $53 trillion USD by 2025. That stunning sum would represent more than one-third of total assets under management worldwide.

ESG baseline

However, there’s a big catch: Some investors may not be getting what they think they’re getting with ESG-branded investment products, as a widely-shared Bloomberg article, The ESG Mirage, and many others have highlighted in recent months.

The Bloomberg article focused on some prominent ESG ratings approaches that “don’t measure a company’s impact on Earth and society. In fact, they gauge the opposite: the potential impact of the world on the company and its shareholders.” Such practices – surprising as they may be to ESG investors who believe their dollars are directly financing a better future – are actually very common. Indeed, they are a natural place to start since they fit within a conventional finance lens of risk management. Many experienced ESG investors are very clear about the value of their approach and about its limits. 

As we sometimes say at the GIIN, “ESG will become good hygiene.” It will eventually be a baseline. It is important for sound investment practice, but it’s not enough to get the world out of trouble. 

In the near term, though, lofty ESG expectations are climbing even higher, and the gap between ESG over-promising and ESG reality threatens to bring the wave of global distrust crashing down atop all “sustainable”-branded investments. Such investments risk being excessively hyped into meaninglessness; and just as bad, that greenwashing threatens to undermine investment approaches that truly focus on generating a positive impact on people and planet.

Impact lens

Fortunately, a rapidly growing community of investors – ranging from big institutions to individual retirees – is building beyond the ESG baseline and demonstrating how to successfully invest with an impact lens. They are charting a path for others to follow. These investors are committed to using their capital to invest for positive impact in line with their financial objectives. They are not just focused on the impact of the world on their portfolio, but on how their portfolios can be invested to create an inclusive, sustainable world that will support a healthy economy over the long-term.

For this community and the world leaders seeking to support effective investing with an impact lens, the recent G7 Impact Taskforce report, Time to Deliver, offers practical recommendations that can be implemented immediately. In the report, the Taskforce gives strong support to plans for “a global reporting ‘baseline’ on impact related to enterprise value.” 

That baseline is the type of basic financial materiality presently covered by many ESG considerations. It’s vital; it’s “good hygiene.” But the Taskforce recognizes that more is needed. So, the report also calls for an “urgent build” atop that baseline, pushing toward a set of widely accepted “standards to cover all impact data, not just data related to enterprise value.” Such data standards will help investors better understand and compare the real-world outcomes of their investments. 

Building beyond

Clearly, the report’s “baseline and build” approach is an important start. But at the GIIN, we are convinced that investors must ultimately aim even higher – an approach that might be called “build and beyond,” with an emphasis on beyond.

To go “beyond,” our world needs more investors and business leaders asking a new question: How do you ensure that your portfolio performs in our turbulent and rapidly changing world, while also investing now for a sustainable, regenerative future economy that serves all of society and the planet? More and more people – from retail investors to regulators – are recognizing that this question is not reserved for ‘do-gooders’ but is rather about reshaping the fundamentals of our economy. All investors bound by fiduciary duty must address the need to invest for a healthy planet and a fair society in order to serve their clients’ interests for the long-term.

In this way, the “build and beyond” approach is primarily about long-term thinking. Like the G7 Taskforce, the GIIN envisions a future in which impact is integrated into every investment decision alongside risk and return, a future in which transparency about the real-world outcomes of investments is embedded into the culture of finance. Taken together, these transformative changes can help rebuild badly eroded trust and push finance towards a “race to the top” for investing in a better future. But they have potential for even more: They can help us emerge beyond this moment of global poly-crisis into a more sustainable, more inclusive world.

Thinking “beyond” may be about the long-term – but for a world in trouble, it can’t come quickly enough. 

Amit Bouri is co-founder and CEO of the Global Impact Investing Network