Sustainability outcomes: How can investors support the development of meaningful data?

At this year’s World Economic Forum in Davos, warnings by about climate inaction and companies’ misleading sustainability claims loomed large.

UN Secretary-General António Guterres called on global businesses to review their climate pledges, highlighting that they are often based on “dubious and murky” criteria, leaving the door “wide open to greenwashing”.

Meanwhile, an investigation by the Guardian and other outlets has found that more than 90% of rainforest carbon offsets by a leading certifier are “worthless” – highlighting that greater scrutiny over companies’ sustainability claims is more needed than ever.

Investors that want to understand whether they positively or negatively contribute to global aspirations such as meeting the UN Sustainable Development Goals (SDGs), need credible and actionable data on companies’ sustainability performance and the effects of their activities on people and the planet.

In addition, in many jurisdictions, investors may actually be required to consider and act on the sustainability outcomes connected to their activities, when such outcomes can help achieve their financial objectives, as our research shows.

So, how are investors starting to consider sustainability outcomes, what are the data challenges they face and how can they help to address these?

Investors are just starting to navigate sustainability outcomes

Sustainability outcomes refer to the positive and negative effects of investment activities on people and/or the planet (whether intended or not).

Given their central position in financing the economy and as stewards of capital, investors can influence sustainability outcomes. For example, by engaging with an apparel company that has poor supply-chain due diligence to help improve labour practices, therefore helping to ensure decent work for all (SDG 8).

However, for many investors, embedding sustainability outcomes considerations in their investment activities is still a nascent practice. Only 20% of financial institutions surveyed by the World Benchmarking Alliance publicly acknowledge their impact on the planet or society.

Our report analysing the 2021 reporting data on sustainability outcomes reaches similar conclusions. Despite two-thirds of reporting signatories being aware of the intended and unintended outcomes of their investment activities on the real world^[1], only 33% said they had taken action to improve them.

Those actions were skewed towards climate mitigation and outcomes – such as achieving gender equality or contributing to clean energy – with relatively standardised and quantifiable metrics (e.g., percentage of female board members or renewable energy consumption, respectively).

Addressing other outcomes, such as biodiversity loss, human rights abuses – or any other outcomes where materiality can be difficult to demonstrate, at least in the short term – was less frequent.

Data quality is a significant challenge

So, what is holding signatories back? In their PRI reporting, many have said that poor-quality data is a major barrier to better incorporating sustainability outcomes in their investment practices.

Sustainability outcomes are often difficult to determine and assess. They can be affected by many unpredictable factors outside the control of a responsible investor, making it difficult to evaluate how effective any action is (or will be) in improving them.

Exacerbating this problem, there are multiple guidelines and approaches for collecting, disclosing, verifying and analysing data, leading to information that is very often incomparable, incomplete and biased.

This lack of standardisation was often reported as problematic by investors because it often blurs the lines of what is actually being assessed: the impact of the outside world on investments returns (i.e., single materiality) or the impact of investments on the outside world (i.e., double materiality).

This is particularly the case for human rights data. Our recent report, Managing human rights risks: what data do investors need, shows that when investors or data providers assess companies’ human rights due diligence practices, they often focus on whether companies have shown how they identify risks to their businesses, rather than risks to people, as international standards expect.

Companies may receive a high rating from some data providers because they disclose that they have assessed the materiality of certain social issues, regardless of whether they show that they have considered the most significant risks to people or are taking actions that contribute to better outcomes.

There are some recent developments in sustainability reporting that could improve data quality and availability. The draft European Sustainability Reporting Standards mark a significant step towards the generation of better sustainability outcomes data, because of their double-materiality focus, issue coverage and level of detail.

On a related note, while focused on single materiality, the PRI is supportive of the International Sustainability Standards Board, which should also contribute towards establishing consistent disclosure rules across markets.

Regulators are also targeting companies’ sustainability claims directly. Among recent initiatives, the EU has proposed a directive to ensure consumers can make more informed, sustainable choices, while preventing companies from making sustainability claims that are not backed up by clear evidence.

How can investors support the development of better sustainability outcomes data?

Investors can help accelerate the development of accurate and decision-useful sustainability outcomes data. Signatories could:

• use multiple data sources, including those that are completely independent of the investee (e.g., satellite imagery and media coverage of ESG incidents); and
• scrutinise these before use. Conducting a rigorous quality assessment of each data set can help establish whether it provides a true, fair, and actionable picture of an investee’s sustainability impact.
  • This should include examining the motivation and incentives of all parties involved in providing the data, the extent to which standard methodologies and criteria are followed, and whether the data can be used to hold investees accountable.
• engage selected data providers to address identified data quality problems;
• engage policy makers and standard setting bodies to develop robust and rigorous mandatory sustainability disclosures; and
• contribute to consensus-building efforts to produce decision-relevant sustainability information and metrics for taking action on sustainability outcomes.

The bottom line is this: measuring and reporting on sustainability outcomes is not a proxy for action. Investors can only meaningfully contribute to positive sustainability outcomes and decrease negative ones by integrating relevant considerations and targets into their core investment and stewardship practices.

We will continue to support signatories in their efforts to do so through our work on driving meaningful data, policy, sustainability outcomes, Climate Action 100+, Advance, and partnerships with organisations such as the Impact Management Platform.

 

 

The PRI blog aims to contribute to the debate around topical responsible investment issues. It is written by PRI staff members and occasionally guest contributors. Blog authors write in their individual capacity – posts do not necessarily represent a PRI view.