Director of Impact Measurement & Management, MaRS Discovery District
Last year, sustainable or ESG investing represented over a third of all assets under management. But what exactly does the green investment revolution mean? Here, Jason Sukhram, Director of Impact Measurement and Management at MaRS Discovery District, offers a short primer.
ESG investing is exploding in popularity. What’s behind this?
Environmental, social, and governance or ESG is one of the biggest buzzwords in the investment world. There’s a growing demand for metrics on the impact companies have on society besides just financial returns. It’s not just shareholders and investors who are asking for it — it’s also a priority for customers and employees. ESG has become a way to talk about those non-financial factors.
What’s the difference between ESG and impact investment?
ESG is a framework that companies use to address some of the negative effects they contribute to, such as greenhouse gas emissions or poor labour practices. Impact investing aims to create measurable positive social and environmental outcomes through investment strategy.
Is there a danger of greenwashing with ESG?
To its credit, ESG has been effective in making certain criteria around impact very clear. Criteria on such issues as carbon emissions, supply chains, and diversity in leadership provide an easy-to-understand structure for how a company can make a difference or at least mitigate the negative effects it has on the world.
The problem is, with no standardization, measurement, or verification requirements around ESG criteria, companies can generally report on what they want to on a voluntary basis. This gives them the opportunity to report based on the expectations of their shareholders. It doesn’t create a huge incentive for mitigating harmful effects or creating positive impacts.
How can investors encourage companies to be more impactful?
It’s tough for individual investors because their influence over what can change within a company is relatively minimal. Institutional investors, on the other hand, have the ability to influence the companies they invest in. One important trend we’re seeing is that large investors are creating methodologies and scorecards that show they have an expectation of financial return as well as specific social and environmental outcome thresholds they want a company to reach. And they make investment decisions based on whether a company is able to meet those thresholds.
We’ve also seen more traditional investors signing up for things like the UN-supported Principles for Responsible Investment — there’s a growing recognition that managing sustainability and environmental concerns align with their fiduciary responsibilities to their clients. Over time, I believe that responsibility to society and the planet will be inseparable from their responsibility to shareholders.
How can ESG investors better measure their impact?
Companies and investment firms need to strengthen their ability to measure and manage impact. This is going to require a change in mindset as well as a change in business culture — it will require new skills, new teams, and new functions to manage performance.
The same way an investment team would advise a company on maximizing its financial performance, I would love to see a future where all investors — not just impact investors — are providing advice, guidance, and services around how a company can also improve outcomes for people and the planet.