At this year's annual meeting of the World Economic Forum (WEF) in Davos, the global elite have once again discussed how to invest for more stable and sustainable economies. So there is no better time to remind companies and investors of the importance to measure not only their financial but also their non-financial performance. Or as Klaus Kleinfeld, CEO of Alcoa, reminded us yesterday during a breakfast on "The New Leadership Contract" hosted by Oxford's Saïd Business School and Heidrick & Struggles, "What doesn't get measured, doesn't get counted "! More and better data means greater transparency. Transparency means greater accountability to all stakeholders, which include shareholders and the environment.
The trend towards impact and responsible investing has been primarily through principle-based frameworks -- that is now finally shifting to include metric-based systems. Putting hard metrics and generally accepted accounting frameworks around the impact that investments make on stakeholders is hard. Yet it is a critical step on the path for impact investing to move from "the margin to mainstream", in the words of the WEF's eponymous report on impact investing.
A crisis is terrible opportunity to waste -- and since the financial crisis of 2008 it has been encouraging to hear investors and asset managers from around the world sound a loud call for more transparency and better data -- both financial as well as non-financial data. Since the 2000 launch of the Global Reporting Initiative (GRI), companies actually have had a framework to report and disclose their efforts around corporate responsibility. But as Peter Bakker, President of the World Business Council for Sustainable Development (WBCSD) stated in a blog for Harvard's blogspot, aptly titled Accountants Will Save The World: "Any corporate reports describe sustainability as a 'journey' without a destination."
Perhaps the best benchmark for the growing, global appetite among investors for responsible investing is the stir over the UN's Principles of Responsible Investing (UN PRI). It has rapidly grown since 2006 to over 1,200 asset managers from around the world, who collectively manage a staggering $34 trillion; that's about 15 percent of the world's total capital invested. All of these managers, by signature of their CEO, have committed to invest their capital based on six principles of responsible investing. The UN PRI has done a world of good -- and a lot of good to the world: the seemingly simple act of pension funds and other large asset managers asking their investees about the social and environmental impact their investments have made has raised awareness and changed behavior of where and how capital gets invested.
In fact, the UN PRI grew so fast that in 2010 it made internal governance changes, which it did without asking its members for approval of the outcome. That hasn't sit well with at least six Danish asset managers, once among the trail-blazing supporters of the nascent UN PRI. In a recent joint letter to the UN PRI, days before the December holidays, they cited "several attempts to improve conditions within the PRI" and announced their withdrawal from the framework "until the organization re-establishes the fundamental principles of governance that existed before." Even the UN PRI is being held accountable to its own governance standards. Good for those great Danes!
Part of the identity crisis this shock-withdrawal may be spinning the UN PRI into is to no fault of the organization itself. Think about it: by using quantified metrics, rather than principles, investors can not only count their impact, but also they can be held accountable, which has been a growing concern about both the GRI, as well as the UN PRI. A decade ago such metric systems barely existed. Today they do and investors are using them with increasing frequency and intensity!
Even if these emerging metric systems remain imperfect and incomplete, ESG-data (environmental, social and governance data) is being aggregated at a fast clip. Bloomberg's ESG's database now comprises 300+ ESG data points on 10,000 public companies (and increasingly on private companies too). B-Analytics, a rapidly expanding analytical tool for private companies to "measure what matters" has been used by over 8,000 companies and an increasing number of private equity managers, initially in the US, now also in Europe and beyond. 2013 also saw the launch in the US of SASB, the Sustainability Accounting Standard Board, FASB's counterpart for setting sustainability standards for public companies. The World Business Council of Sustainable Development, with over 200 large corporate members, including all Big Four accounting firms, is leading an initiative in which Prince Charles' Accounting for Sustainability Project, will collaborate with the International lntegrated Reporting Council (IIRC) "to make sustainable performance concrete, measurable, comparable."
Increasingly these and other data sets allow for comparing, benchmarking, indexing, rating, analysis, risk management and reporting all together integrated with financial data. Once we have arrived there, we are back from a triple or double bottom line, to a single, integrated bottom line that captures all available data.
As the dialogue at Davos on sustainable economies evolves this year, let's keep our eyes on the prize: by building better tools and analytics around data, mainstream investors are increasingly able to count and make transparent how their investments perform for society and environment in addition to their financial performance. It's the only way forward for a form of capitalism that is sustainable.
This post is part of a series produced by The Huffington Post and The World Economic Forum to mark the Forum's Annual Meeting 2014 (in Davos-Klosters, Switzerland, Jan. 22-25). Read all the posts in the series here.
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