ESG Investing

How Consensus Building is Enhancing ESG Investing

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Interest in environmental, social, and corporate governance (ESG) investing has exploded recently. But the sector is still far from mature. In fact, like any fast-developing area, it’s experiencing plenty of growing pains, perhaps most acutely felt in a lack of coherent standards. This lack has led to a confusing array of definitions and nomenclature, as well as a lack of coherence in measurement, reporting methodologies, and investment practices.

Consensus has therefore become a major goal, and several organizations are working collaboratively on the process of broad-reaching consensus building.

“There is a wealth of opportunity for consensus building because the industry is still defining itself,” says Essma Bengabsia, senior associate, sustainable & impact investing at Glenmede. “It’s crucial for creating standardization.”

Building Coalitions among ESG Actors

Much of the most notable collaborative activity in the ESG investment space involves coalitions of investment groups, foundations, industry groups, and others. These are typically spearheaded by a particular nonprofit and focused on a particular goal.

A good example is the set of 77 industry-specific sustainability accounting standards covering financially-material issues, which are the issues that are reasonably likely to impact the financial condition or operating performance of a company . These were published by the then Sustainability Accounting Standards Board Foundation (SASB) in 2018. The six-year-plus effort to establish these standards involved extensive consensus building among investors and businesses from all sectors to assess how specific ESG issues affect the financial health of organizations.

That collaboration continued after the initial standards were published. In September 2020, the SASB committed to working with other ESG standard-setters, including the Climate Disclosure Standards Board, the Global Reporting Initiative, and the Carbon Disclosure Project, to help set and maintain standards investors could refer to. Then, in June 2021, it merged with its long-time partner the International Integrated Reporting Council to form a single entity called the Value Reporting Foundation.

The more these like-minded groups come together, the closer the investing world can come to broadly-accepted consensuses on how best to conduct ESG investing.

Consensus Building to Measure Impact

Organizations are also working to design standards for measuring impact investing performance. For example, the Global Impact Investing Network (GIIN) worked with multiple groups and hundreds of impact investing practitioners from around the world to develop its IRIS+ impact measurement framework, which includes KPIs that investors can use to measure impact in specific sectors or with a thematic focus. Introduced in 2019, the tool collects and aggregates data from organizations anonymously to help the industry identify benchmarks for impact performance.

The focus of SDG Impact, an initiative run by United Nations Development Program, is on catalyzing investment to achieve the UN’s Sustainable Development Goals (SDGs) by 2030. The initiative is working to create best practices for internal management and other decision-making entities wanting to embed SDG-focused activities into their approach.

To do that, the group has relied on a consultation process with the investment and business community, civil service organizations, human rights experts, other UN bodies and initiatives, and relevant industry groups to develop standards for enterprises, private equity, and SDG bonds.

Breaking Down the Consensus Process

Consensus building is important if all relevant stakeholders are to reach agreements. When it comes to ESG standardization, however, there are typically too many parties involved to get everyone in one room at one time. For that reason, an important element in the consensus decision making process is relying on smaller working groups.

For example, to create and enhance IRIS+, GIIN enlisted the help of a robust array of groups focused on different sectors and themes that collectively developed the final product together. Their conclusions inform the work of the IRIS+ Advisory Body, which includes two committees—a strategy committee and a technical review committee—that provide advice, guidance, and support for the ongoing development of IRIS+.

Other tactics for facilitating a consensus include splitting meetings up into smaller groups for discussion and breaking big decisions down into more manageable chunks.

Ultimately, the need for impact investors to work together and reach consensuses about impact best practices is likely to remain for the foreseeable future. Multiple efforts currently underway are already making a big difference.

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