Current SI mechanisms do not have significant impacts in solving global sustainability problems

22 Jul, 2020 02:26
source: Singularity Financial

Singularity Financial Hong Kong July 22, 2020 – Sustainable investing (“SI”) is increasingly thought of as a tool to achieve societal goals, such as the United Nation’s sustainable development goals (SDG). However, the ESG metrics that currently guide SI are not adequate to assess such outcomes, because they fail to reflect the investor impact on companies.

Sustainable investing does not have a significant role in solving global sustainability problems as it currently stands, according to researchers affiliated with MIT, Harvard Kennedy School, University of Zurich and the University of Hamburg. The research team undertakes a comprehensive literature review which identifies and compares the relevant mechanisms of investor impact.

The bulk of ‘sustainable’ or ‘impact’ investments currently rely on impact mechanisms that promise only modest impact, according to the research team’s newly released paper entitled Can Sustainable Investing Save the World? Reviewing the Mechanisms of Investor Impact.

The research looks at the mechanisms: shareholder engagement, capital allocation and indirect impact. It concludes that shareholder engagement impacts are relatively reliable, capital allocation impacts are likely to work under the right set of circumstances, and indirect impacts are relatively uncertain.

The results hold important implications for investors, ESG data providers, and
policymakers.

Investors who want to contribute to societal goals could as a first step expand shareholder engagement activities. As a second step, they could increase their capital allocation impact by screening for specific ESG practices with low reform costs in unison with a large coalition of investors, or by focusing on small and medium-sized companies that have positive company impact but lack access to external capital.

ESG data providers should consider developing metrics of investor impact, which would profoundly change the decision-making in SI.

Policymakers who see SI as a way to drive change should consider that SI seems more effective in spreading ESG practices and less effective in transforming business models and industries.