ESG must measure the past to talk to the future

I’ve already had some conversations about this morning’s blog in which I suggest that the public are skeptical about responsible investment in the absence of information about how much they’re paying to invest responsibility (their greenium) and the value for paying it (the impact). For instance

The greenium is measurable, the impact or “value” is really tricky. I don’t think we can look at impact as a forward looking measure, but back-testing is problematic, most ESG strategies are recently introduced.

It’s true that most workplace pensions weren’t making explicit allocations to funds targeting climate sustainability , or affordable housing or investing in innovative start-ups or micro-financing people over-paying for credit.

But the risks surrounding climate, housing, debt and start-up capital did not spring up overnight and there are plenty of examples of asset managers investing to reduce these risks. We have data that tells us the returns investors get from such strategies, but the success of those strategies in terms of their impact.

And I am surprised that not more information is available to the public showing how valuable impact investing is, relative to the cost (the greenium) people pay to research and implement in private markets.

And I’m also surprised that organizations such as the Investment Association, the PLSA and other proxy voters, cannot identify the value of good governance. Back in 2010 , Don Ezra ( a friend of this blog) told us that Management is about getting getting  while Governance is about “process”. This has led to arguments that it’s fruitless to find academic proof  of the value of governance. I don’t agree, the value of installing and maintaining  good governance processes have to be measured and if they can’t be measured, people will doubt they exist.

Such stark empiricism is needed if ESG and the broader idea of “responsible investment” are to take hold. I think its critical that the public has tangible evidence that good governance , an emphasis on social impact and investment in cleaner environmental processes –  pay-off.

Most importantly, it is a matter for Government to help collect and promote information that is relevant to the public, so that people feel more enthusiastic about these strategies being employed with their money.

This process started with the TCFD disclosures which are now being extended to cover plans an investment has for the future – The Sustainable Disclosure Requirements (SDR) in the “Green roadmap”..

We cannot expect pension schemes to sign up to this new level of disclosure unless it is proven that the matters to be disclosed make a material difference to the sustainability of the planet and reduce climate-related risks to the investments themselves.

The public – which includes me – deserve to be told of the impact this work is likely to have both on their returns (net of these extra costs) and on the impact on the planet. Which means reporting to people in a meaningful way on the value these new investment strategies are giving for the money people are paying to have them implemented and run for them.

We do need a measure of VFM for investment  and I don’t think we can have this as a speculative measure, what arrives by way of extra value needs to be measured and monitored.  The impact of a pension scheme is to be measured by its capacity to deliver  increasing value through sustaining investments , not just buying into green investments.

But we should not have to wait for VFM metrics. Asset managers who use metrics today, can use these metrics on historic allocations and – where there is information – measure whether investment strategies are becoming more efficient (or not) in delivering positive impact as well as return.

These VFM measures inform on cost and charges (the Greenium), performance (the value in terms of impact and return) and on quality of service (in terms of feedback on investments and the provision of voting or intention rights.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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