Comment: Why understanding ESG investments is a drive for transparency

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Comment: Why understanding ESG investments is a drive for transparency

Geoff Blake, in a guest ESG Comment for II, explains the significance of the UN's Sustainable Development Goals and how KBI Global Investors' analysis helps investors to understand what it is they are actually investing in. 

When our peers use terms such as "aligned," "mapped," "meet" or "track" in the context of their investment strategies and the United Nations Sustainable Development Goals (SDGs), it confirms the relevance of the ground-breaking body of work we undertook, and which allows us to measure impact, across our suite of Natural Resource strategies. 

Our approach enables us to tell our clients the actual percentage of each portfolios' revenue that is working to achieve the SDGs - a hard number calculated using our proprietary Research Assessment Study (RAS) methodology.  It helps investors to understand what they are really investing in, and that's important as part of our drive for total transparency.

For almost two decades we have been investing in companies actively engaged in providing solutions to some of the greatest challenges we face on the planet today – namely supplying adequate water, food and clean energy to a growing global population over the coming decades."

For almost two decades we have been investing in companies actively engaged in providing solutions to some of the greatest challenges we face on the planet today - namely supplying adequate water, food and clean energy to a growing global population over the coming decades. 

The activities of these companies have always delivered a positive impact on the environment and society at large, but we can now measure that impact for our clients.  Driven by the exponential growth in sustainable investing, investors are presented with a constant stream of new market entrants, so it's more important than ever that they understand and challenge the strategies they are investing in and what they claim to be. 

That's why we look at every company in our portfolio and do not select a subset of handpicked names in highlighting the impact of our strategies.

We break each company down into its underlying business activities.  Then we map the revenue generated by these underlying activities to the individual SDGs.  By carrying out this painstaking bottom-up analysis we can analyse and measure the total revenue of the entire portfolio.  

This makes us one of but a few managers, if not the only manager, capable of allowing investors to see the entire revenue stream of each strategy and how it is either positively, neutrally or negatively driving the achievement of each of the 17 SDGs.  We update and publish these numbers annually and encourage investors to look carefully at the facts when it comes to understanding what investment managers mean by impact investing, and the way in which they validate it.

By examining a company's revenue stream, we can take into account revenue that may be negatively aligned with the SDGs and activities having a negative impact or detrimental effect on the environment or society.  As many of today's global corporates have complex businesses with revenue streams across multiple divisions, it is very important for us to be able to categorise those that inhibit the potential of achieving the SDG goals. 

A single company may be engaged in many different types of business activity. One business line of a company might be contributing to the achievement of a particular SDG, whilst another might have no positive impact at all on any SDG - another might also contribute positively, but to a different SDG, while still another may actually be detrimental to the achievement of the SDGs.

Analysing the analysis
It would be quite wrong to in some way aggregate or average out these effects and then decide in some arbitrary fashion that the company was as a whole contributing to a given SDG.  Instead we opted to examine every business line of each company in our portfolio.  We determined the amount of revenue accruing to each activity, and then assessed the extent to which each activity contributed, or not, to the achievement of each SDG.

This analysis also allows the team to highlight company activities where we might look to engage.  Last year, packaging emerged as a significant issue with some of our food companies, and we engaged with many to ensure they have a policy to tackle this pressing issue.

This analysis - quantifying the revenue for each business activity of each company in the portfolio - was a significant piece of work, involving identifying close to 200 different business activities, and the revenues accruing to each.

Geoff Blake is head of global business development at KBI Global Investors

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