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June 21, 2023

A proposal to measure sustainable investment impact

Amid the multitude of ESG commitments, Boston Consulting Group and GenZero suggest a way for asset managers to measure climate impact.

By Adrian Murdoch

impact measurement, climate
Does it measure up? Climate impact measurement needs to be front page news, says BCG. (Photo by Pixel-Shot via Shutterstock)  
  • Although there has been $1.5trn private investment in sustainable solutions over the past five years, that needs to rise to $4.5trn over the next five.
  • Boston Consulting Group and GenZero have developed a framework for investors to manage and measure their climate impact.
  • Unlike carbon accounting, which assesses the carbon emissions of a specific company, climate impact measuring considers a company’s positive carbon impact.

The asset management industry is still struggling with ESG engagement. Last year, Capital Monitor‘s analysis of the top 100 largest fund managers by assets under management (AUM), showed 90 had signed up to at least one formal ESG-linked commitment or initiative.

In fact, on average each asset manager is signed up to 24 ESG-linked public initiatives. No wonder there is a muddle.

At its heart is the concern about how to make a difference. “What impact does your investment actually have on the total amount of carbon that’s in the atmosphere?” asks Greg Fischer, partner at Boston Consulting Group (BCG) in London.

More than $1.5trn in private investments have gone towards climate finance over the past five years, but that number needs to rise to $4.5trn over the next five if there is to be any hope of reaching net zero by 2050, according to BCG.

“We need to motivate that increase, but we also need to allocate that capital effectively,” says Fisher.

He was speaking at the inaugural GenZero Climate Summit 2023 in Singapore last week to launch a new report that looks at how investors can manage and measure their climate impact.

BCG, together with Temasek-owned decarbonisation-focused investment platform GenZero, have developed a framework not only to measure impact but also how to improve investment decision-making.

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This is something that has been missing. Earlier this year, the European Environment Agency said the ways to measure the impact of investments were “still lacking”.

Four ways to measure impact

Different from carbon accounting, which assesses the carbon emissions of a specific company, climate impact measuring considers a company’s positive carbon impact. The report highlights four aspects to consider when measuring the impact of investments.

The first is to understand whether the investment is into a company that has a direct climate impact, indirect impact or transformational impact.

“All three impacts are critical for us to get to a net zero and not one of them is more important than the other,” explains Ashley Chan, investment strategy and business development director at GenZero in Singapore. But investors should recognise the differences and understand investment strategies may also differ.

Direct climate impact companies directly reduce or avoid emissions and include, for example, reforestation projects and solar power plants. Indirect climate investments are in companies that provide enabling infrastructure or technology, such as an exchange that helps transact carbon credits from a reforestation project or a company that distributes solar panel components.

Transformational climate investments are in companies that develop next-wave technologies like more effective soil-carbon monitoring solutions or more efficient photovoltaic cells.

“You need to have a common language to say when you make the decision between allocating investments to a deforestation project versus a carbon exchange that understands the impact that you’re generating,” says Fisher.

The second point they make is for investment managers to understand how much impact to claim.

Five private equity funds, for example, invest in a solar panel operator taking a 20% stake each. The traditional model is that each private equity firm claims 100% of the climate impact. It is certainly simpler and doesn’t require as many assumptions when taking a forward-looking view. Except there is a danger of double accounting.

“Allocation is not just a matter of scorekeeping. It’s about being credible and intentional about understanding how the capital that you invest is translating into the progress we all need to make towards global net zero,” says Fisher.

The third aspect is to consider the time frame to measure impact. With the solar panel operator, do you take the climate impact of the solar panels generated during the holding period? The lifetime impact of the solar panels sold during the holding period? Or the impact of all solar panels sold during the lifetime of the company?

“There’s no one right answer,” says Fisher, but he points out that limiting impact to what is generated solely within the investment holding period may deter investors from making investments in early-stage solutions.

Finally, as Chan says, investors need to think about the trade-offs between “volume as well as quality”.

Investors generally operate under a more-is-better approach and usually step up their expectations on growth and returns over time. Instead, a continued climate transition requires the next wave of solutions that may take longer to mature and are more costly to develop, deploy and scale.

“The same amount of capital could actually be less as we go along the curve, and that’s where we also have to be dynamic in terms of how we set our targets as well over time,” Chan continues.

Change your priorities

“This can’t be appendix seven of your investment review committee memo,” says Fisher. “Climate impact measurement needs to be something that’s on the front page.”  

It is no longer a nice-to-have investment practice but a critical component to reach net zero, they argue. And it should be talked about in the same language that people use when talking about commercial returns.

As with so much of the sustainability world, at the moment there are no international standards about climate impact measurements – although the United Nations outlines a baffling array of metrics.

“We need a practical framework that is robust and data-driven, but also easy to understand and actually applicable and usable across the entire organisation,” concludes Chan. “Every investment professional needs to be able to understand and use this in the investment decision-making process.”

[Read more: Responsible investing: ShareAction rates the top 77 asset managers]

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