New Metrics

Accurately Measuring Impacts of Sustainability Investments Needed Now More Than Ever

On the third and final day of New Metrics ’16, Paul Herman of HIP Investor gave us a to-do list:

By Nassy Avramidis | Published 8 years ago | About a 9 minute read

On the third and final day of New Metrics ’16, Paul Herman of HIP Investor gave us a to-do list:

Ask ourselves if we are being extractive or innovative?
Note that the Best Companies to Work For perform nearly twice as well as those that aren’t listed
Get to know our CFOs – they are real people who want to do good. Help them link financial benefit to social good.

With these tips in mind, Herman led an educational journey through the investment opportunities of sustainability – from impact investing and risk implications of sustainability portfolios to investing in nature and eco-entrepreneurs.

First, Dr. Robert Johnson, President of Becker College, shared how he put his ideas into action to invest more sustainably. He recently moved Becker’s endowment portfolio to 100 percent impact investments. Along the journey, he explained, the board was originally skeptical, but he was able to garner approval when they considered the long-term view of potential capital growth. Dr. Johnson explained how investing in human capital is the most important aspect of the journey – educating young people to usher in a new economy. 84 percent of a company’s value is in intangibles such as people. Since we’re on a new frontier and we’re on the right side of history, we also need to think about these “intangibles” to see how they make a difference. Dr. Johnson also posed a challenge - to ask ourselves, what are we doing today to make a difference with our investments? It doesn’t matter what we did 10 years ago, but what have we done lately, and what are we going to do tomorrow? The planet is counting on us to leave the world better than the way we found it. By 2050 there will be over 10 billion people living on this planet and it’s not sufficient to just talk about climate change - we need to put our money where our mouths are, and not wait for someone to tell us what to do.

Next, shareholder attorney Sanford Lewis and Bill Baue of Reporting 3.0 made a strong case that true materiality, even under U.S. securities laws, includes economy-wide impacts and so-called externalities. They grounded their conversation in the U.S. Supreme Court definition that information is material for investors if “there is a substantial likelihood that the omitted fact would have significantly altered the total mix of information available to the reasonable investor” (TSC v. Northway). The legal fiction of an individual, archetypal “reasonable investor” against whose interests materiality is determined collides with the reality of diverse, real world investors, many of whom are duty bound to monitor systemic risk and portfolio wide impacts. Determining materiality should consider this array of investors focused on the company and reading the company's disclosure report. Whether a company is found to omit or mislead regarding material information is contextually specific under securities law. A company that brands itself as a sustainability leader can reasonably expect to be held to higher expectations on the elevated materiality of sustainability information, including the materiality of information that it might fail to disclose that illuminates its sustainability challenges. For all companies, materiality necessarily considers questions such as: What are the array of investment scenarios and considerations that merit treatment as material? Does the firm consider investors that may hold shares in the company for the next 15 years? Does it consider investors that are using environmental, social and governance (ESG) matters as a proxy for management quality? Does it consider the investors who are making buy and sell decisions based on long-term considerations such as climate change, and therefore for instance, considering the extent to which a company is committed to growing its reserves of fossil fuels? Does it consider investors driven by ethical concerns, such as socially responsible, religious or mission-driven investors?

P.J. Marshall of Restore the Earth Foundation then shared with us the value of restoration, and how the Foundation has turned $1 of investment into $9 of shared value. Over the last 50 years, 60 percent of the earth’s ecosystems have been degraded or destroyed; the Foundation’s big vision is to restore the Earth’s essential ecosystem and do it at a landscape scale. Landscape-scale restoration is powerful because it is holistic - it integrates ecological and economic health and becomes sustaining. Landscape-scale restoration is cost effective and impactful because it is taking the long-term perspective, looking at generations and centuries of impact.

Marshall then unveiled Restore the Earth’s EcoMetrics Model, an integrated value model that maximizes every dollar that is invested and monetizes the full value of the restoration project in terms of environmental, social and economic impacts. She contends that the Foundation has truly unlocked the business case for landscape-scale restoration: Metrics have proven that $1 returns well over $9 in environmental social, economic benefits and impacts.

Next to the stage was Lindsay Clinton of Intellecap, which is working to build an ecosystem of support and investment for entrepreneurs using impact fund management. Clinton shared how Intellecap is using an ecosystem approach, which is not just about provision of capital – it is providing a knowledge base to enterprises at the bottom of the pyramid. In addition to capital investment, this includes both knowledge and advisory, as well as building networks. This holistic investment practice is impacting over 28 million people, and growing. Measuring the impact, however, has proven challenging, she admitted - there is no standardized way to measure the impact that this ecosystem of investment can have, and impact measurement as a practice lacks context. It often leaves the investor out of the equation and puts the onus on the social enterprise to do the impact measurement; we don’t yet ask how many risks the investor took, which is an important metric to analyze. Intellecap seeks to overcome these challenges with its new PRISM tool, which takes a geographical perspective of impact investment measurement. PRISM looks at the state, district and country levels to see where the greatest need is, where to fund risk, and where to fund sustainability. PRISM shows where investments are going, what types of entrepreneurs are being invested in, and whether the fund manager is doing their job – outputs aren’t enough; sometimes the metric you need is the fund input. PRISM promises to be a game changer in measuring the overall success of impact investing.

Martin Rich of Future-Fit Foundation and Michael Jantzi of Sustainalytics next took the stage. Together, they offered a new vision for attracting mainstream investors and equipping them with the tools they need to assess the true level of sustainability of current and prospective investment targets. Rich announced Grant Thorton as an assurance partner to Future-Fit, affirming that there is a market for this type of investing. Jantzi also made a big announcement of a data-based partnership between Future-Fit and Sustainalytics.

To close, David Levine of the American Sustainable Business Council rounded out three days of learning with a reminder that, in light of the election outcome, it’s time to raise our business voice and aggregate our efforts to convince both local and federal government that sustainability is the right economic path. It doesn’t matter what organization we do it through - the idea that we will do it together is the opportunity for seismic change.

We came together as a community for New Metrics ’16 and we leave feeling inspired and ready for collective action toward a flourishing future.