Subscribe
Featured Image

Will Impact and ESG Investing Become Synonymous in the Future?

ESG

By Adam Salvatori  |  March 8, 2021

According to the Truvalue Labs™ ESG Investor Forum 2020 poll, 28% of respondents said their investment framework was currently aligned to the United Nations' Sustainable Development Goals (UN SDGs) while 42% said they have plans to align. Furthermore, 72% of respondents said social factors are the most difficult to analyze and integrate with environmental ones next at 18%.

These responses indicate that one of the keys to wider SDG adoption is access to better data for both the social and environmental pillars. Moreover, PwC reports only 1% of the firms in their sample measured and reported quantitative performance against SDG targets.

To address the data challenge and accelerate industry adoption of the UN SDGs, Truvalue applied its award-winning technology to build a data service around the SDG framework and has launched the FactSet SDG Monitor. Both the data service and the SDG Monitor are powered by artificial intelligence to measure companies' positive and negative SDG alignment in near real time from more than 100,000 sources in 13 languages. 

Including Impact Alongside Materiality Analysis

Prior to environmental, social, and governance (ESG) goals going mainstream in the last couple of years, it was harder to get buy-in from asset managers and owners to incorporate ESG into the investment process. Therefore, materiality became the lead talking point for ESG because any fiduciary in the world would be required to incorporate it to fulfill their legal obligations. For additional details on ESG materiality please refer to the ESG Materiality Factors in the Fourth Industrial Revolution white paper. 

The next logical evolution in the financial industry is to focus on the full suite of experienced stakeholder externalities, from both an impact and materiality lens. For the purposes of this write-up, an impact lens refers to the SDG goals and materiality lens refers to the Sustainable Accounting Standards Board (SASB) Materiality Framework. Two vantage pointsImpact (SDG) and Materiality (SASB)overlap and can change as new issues emerge or erupt over time as we saw with corporate responses to the COVID-19 pandemic. Looking at both allows for a more holistic sustainability assessment. The Venn diagram below makes it easier to visualize the relationship between impact and materiality.

Impact/SDGs Measure Outcomes vs. Materiality/ESG Being an Active Risk Measure

Impact-SDGs-measure-outcomes

A Unique Holistic Approach to Measuring Impact

FactSet is uniquely able to provide this outside-in stakeholder lens via Truvalue data alongside corporate disclosed revenue information via FactSet's Revere Business Industry Classification System (RBICS), for a holistic SDG assessment. In certain cases, a corporate revenue lens might not be a good proxy for experienced stakeholder externalities. For example, a clean energy car company that has a history of poor labor practices will be evaluated not just on the goal of clean energy, which generates revenue, but also on the goal of decent work, which does not. This is an important difference and illustrates why having both perspectives is essential. For now, the SDG Monitor will focus on the outside-in stakeholder lens, and we will consider the revenue lens in the future.

Monitoring Corporate SDG Goal Alignment in Real Time

The primary motivation to launch the FactSet SDG Monitorwas to close gaps in existing SDG data. These include lack of company-reported data, greenwashing risk, data without the ability to capture both positive and negative information, and the need to measure country-specific impact signatures. The publicly-available monitor allows stakeholders to keep an eye on SDG trends across countries, and major real-time events. That puts the information into the hands of corporate stakeholders in near real time. 

When looking at the SDG Monitor’s data for U.S. corporations it is evident that Goal 16: Peace, Justice, and Strong Institutions, is a big focus with a dynamic impact of 27.3%, whereas in Europe it is just 12.4%. This is intuitive given a hyper focus on social factors in the U.S. this past year and provides evidence of why a one-size-fits-all approach to SDGs is not suitable. Goal alignment is measured by the Truvalue Insight Score on a 0-100 scale, where 50 represents neutral, with scores above that indicating positive alignment, and scores below reflecting negative performance. The average insight across the full company universe in each region is what determines the overall goal alignment score.

US_Europe_Snapshot_NEW

The Amplification of ‘S’ During the COVID-19 Crisis

As shown by the Truvalue Coronavirus Monitor, it is evident when looking at SDG goals during the COVID-19 pandemic that stakeholder attention increased for social and human capital-relevant goals. Stakeholder attention increased for the following SDG goals from January 31, 2020, to February 28, 2021: Goal 1 (No Poverty), Goal 4 (Quality Education), Goal 8 (Decent Work and Economic Growth), Goal 10 (Reduced Inequalities), and Goal 16 (Peace, Justice, and Strong Institutions).

Social and Human Capital Relevant SDGs Volume During COVID-19 on the Global Solactive SGMLMCUT Index

Social_Human_Capital_SDGs_NEW

Will Impact and ESG Investing Become Synonymous in the Future?

Just as ESG has gone mainstream in the last couple of years, impact investing is on the same trajectory to become axiomatic in the industry. To address the lack of data challenge, FactSet launched the SDG Monitor and SDG Data Service to help fill this gap. The European Union (EU) regulatory frameworks being put into place from the EU Green Deal and EU Action Plan will further accelerate adoption and increase the availability of sustainability information. The growing influence of impact investors, following in the footsteps of ESG, can help make the 2030 UN SDGs a reality.

SDG-monitor

Adam Salvatori

Global Head of ESG Client Solutions and Research

Mr. Adam Salvatori is the Global Head of ESG Client Solutions and Research at FactSet. In this role, he leads a client-facing team of financial quants, data scientists, UX designers, and engineers that work alongside clients to find solutions to their hardest ESG integration challenges. Prior, he was the Chief Solutions Officer at Truvalue Labs, served as Global Head of Commodities Systematic Trading Strategies at Goldman Sachs, and was the Co-Founder of the Financial Products division at Kensho. He was one of the first industry practitioners to leverage AI to create indices and co-invented the 4IR new economies sector classification system, and began his career as a mainframe cryptographic security engineer at IBM where he was awarded a patent for his work. Mr. Salvatori earned a dual B.S. degree in both Computer Science and Business Administration with a minor in Mathematics from the University at Albany.

Comments