Maintaining investments within social and ecological thresholds

As the debate about growth versus degrowth rages on, we are in the midst of either a trillion dollar opportunity or a very costly dystopian future.

Last year, a ShareAction article on growth stories said that to enable truly sustainable investing, asset prices would need to be anchored within externally defined ecological thresholds, such as the nine planetary boundaries of Stockholm Resilience. Center, and basic social needs, as envisaged in Kate Raworth’s “safe and secure” article. just a space of exploitation for humanity”.

The report identified a series of actions investors should take, such as:

  • ensure that externally defined social and ecological thresholds are at the heart of corporate and investor sustainability efforts and reporting,
  • accept longer time horizons and lower financial returns, and
  • in partnership with public finance, which may be best placed to incentivize private investment towards the public good.

Can we then assign the reason for the gargantuan climate finance gap that still exists as being partly due to unreasonable financial return targets? If so, it’s high time to accept that not everything can have a solid return, at least not financially.

Evidence of asset owners’ willingness to pay for impact, however, is mixed. Although it is commonly accepted that delivering impact comes at a cost, and studies have shown that investors may be willing to accept lower returns from impact vehicles, other studies suggests that investors’ valuation of externalities is not linear, meaning they do not pay much more for more impact, even when it has been multiplied by 10. This suggests that the demand for Sustainable investing is currently driven by positive feelings associated with the investment choice, rather than a calculated assessment of impact.

A nudge in the right direction

So what would it take to set a sustainable course? Well, to achieve the desired results, we must recognize that initiatives must be technologically feasible, provide sufficient economic incentives, and have a stable political environment, otherwise they will not materialize at the speed or scale needed.

To avoid the current insensitivity to the scope of results-based investing, while ensuring momentum continues, we need standardized measurement frameworks. Thus, policy advocacy should play an important role in investors’ stewardship strategies. A few platforms to follow and get involved are the work of the Principles for Responsible Investment (PRI) and others on “Investing for Sustainable Impact” (IFSI), and that of the Impact Management Platform .

Highlighting the former, you may be aware of the excellent (but lengthy) background analysis carried out. Commissioned by the PRI, UNEP FI and the Generation Foundation, the report found no single or simple answer to the question of the extent to which IFSI is legally required or permitted in the 11 jurisdictions covered. The authors noted, however, that investors are likely to have a legal obligation to consider sustainability impact goals if they are deemed essential to financial return goals, or to pursue them as a goal. distinct and parallel objective.

Therefore, in order to provide the appropriate regulatory framework, the current focus on disclosure regulations must be accompanied by complementary developments in the areas of investor duties and processes. For example, stating that pursuing sustainability impact goals is an option investors should consider alongside financial risk/return.

This would see current expectations fall even in progressive countries like Sweden, where the current mandate of national pension funds is only to ensure that asset management is carried out in an “exemplary manner” through responsible investment. .

Simply following the herd and not taking full responsibility for your “sphere of influence” is no longer enough. We need innovative thinking, bold actions and real responsibility to get out of this hole before it gets flooded.

About Chris McCarter

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