If We Value Just the Monetizable, Then We are Missing the Real Value

Sustainability is more than a global aspiration, now it is an investors' compliance requirement. This is why integrating sustainability considerations into financial operations and transactions has become a challenging and urgent matter for asset managers worldwide. Today, investments are being allocated to assets with potential financial revenues, conditioned to a greater environmental and social impact. This last approach is a game-changer within a traditional profit-driven sector that has been valuing just what is monetizable.

The intricate issue is that what is monetizable is easily measured and therefore valued, but sustainable considerations are not as standardized as the measure of money. In this way, asset managers have been relying on sophisticated ways of measuring Environmental, Social, and Governance (ESG) activities and impact based on robust scoring systems and responsible investment theses to guide, analyze, and assess the not-so-tangible performance.

ISSB, GRI, IRIS+, and other multiple frameworks have been helpful platforms to effectively communicate the real value of investments, beyond financial revenues. Therefore, companies, investors, shareholders, and other business stakeholders can think about and manage their impact on this global trend. ESG measures can provide critical insights into capital deployment and influence financial decisions and efforts that can contribute to sectors that are also delivering better products, goods, or services for supporting sustainable development, such as the immense Agribusiness industry that is creating innovative solutions to improve the productivity of the crop in Brazil while creating sustainable food systems, new jobs and livelihoods, and financial returns.

There is a well-known, evidence-based, and almost universal framework to measure if a crop is more productive or not and if financial returns are working or not. However, the main challenge that asset managers have been facing is the external social impact (S). The social consideration is more likely to be subjective, complex, and undermined, making their measurement and quantification challenging. For example, evaluating social factors like employee satisfaction, community engagement, and human rights practices involves capturing qualitative aspects that are inherently difficult to quantify.

This discouragement from the 'S' is unlikely to continue. Expectations from the immediate audience of the companies (rating agencies, shareholders, boards, potential investors, employees, and consumers) and external actors and other stakeholders that can affect the business reputation will become stricter. This issue doesn't mean that companies shouldn't measure. They should. But they need to do more.

Here are three ways asset managers can widen their focus to capture 'S' information not just about inputs but also about the processes and systems governing the social outcomes and impacts. 

1. Elevate the intangible: Asset managers should value the qualitative information they get from their investees. It is recommended to develop novel approaches to capture and communicate the intangible aspects of the S performance. Qualitative indicators will be useful to create narratives that complement the quantitative metrics and boost the investment thesis.
2. Engage internal stakeholders: Involve relevant departments and staff within the organization, such as the investment and human resources teams, to ensure comprehensive data collection and action towards the ‘S’ goals. 
3. Communicate your approach to decrease the complexity: Stakeholders have different levels of familiarity and understanding of ESG issues. Reporting activities should include the ESG vision and terminology. Communicating what ‘S’ is about will make it more accessible, meaningful, and understandable and will make data relevant to diverse stakeholders. 

By embracing innovative approaches, engaging internal stakeholders, and addressing the varying levels of knowledge and complexity surrounding ESG issues, asset managers can navigate the evolving landscape of responsible investing. Ultimately, by widening their focus to capture the intangible aspects of ESG performance, they can not only meet compliance requirements but also unlock the full potential of investments to drive positive change for both society and the planet.