PI Partnership – M&G Investments ment to driving real-world positive
Ben Constable-Maxwell is head of sustainable and impact investing
DOUBLE MATERIALITY: ORIENTING INVESTMENTS TOWARDS REAL WORLD OUTCOMES
With ESG firmly embedded into the financial
system as underlined by
increasing regulation as well as the grav- ity and scale of social and environmental issues exacerbated by the pandemic, how are investors addressing and evolv- ing what is traditionally a financial-first approach to put real world impact at the heart of investments?
There is a spectrum of approaches availa- ble to sustainable investors, ranging from exclusions and ESG integration through to impact investing. Investors along this spectrum might also have different moti- vations and objectives, from alignment with their values and better risk manage-
change. In responsible and sustainable investing, one size does not fit all. The ESG challenges themselves can be viewed from two different viewpoints: one focuses on how external ESG issues are affecting a company’s business and financial value (an ‘outside-in’ perspec- tive); the other focuses on the effect the company is having on society and the environment (an ‘inside-out’ perspective). A holistic approach which combines these perspectives is known as “double materi- ality”, since it focuses on what is finan- cially material to the company and on what is material to people and the planet. To illustrate with an example, single materiality might consider the financial risk to the company’s value of disruptions in its water supply; but a double material- ity viewpoint would also consider the impact on local communities and the environment of the company’s water extraction methods. This latter aspect may not (yet) be a driver of the company’s value, but it is certainly meaningful from a sustainability perspective.
ESG integration has played a huge role in aligning portfolios with client values and better managing long-term portfolio risks, there are concerns that it has not had the desired effect on real-world out- comes, such as slowing climate change,
reducing inequality and halting degrada- tion of the natural environment. Impact investing – which looks to increase posi- tive impacts and reduce negative impacts – aims to change that. Many investors are focusing more on societal outcomes, thinking about what additional role their capital can play and the contribution they can make to the Sustainable Development Goals (SDGs). If we are going to address society’s priority challenges, the principles and processes of impact investing need to be embraced by mainstream finance. And a focus on double materiality has a role to play in this transition.
Swapping footprints for handprints Climate change is a vast area of risk that stops at no borders – and requires a mul- titude of actions and solutions. Here, tra- ditional ‘outside in’ ESG approaches would look at climate change largely through the lens of how regulation or cus- tomer preferences might affect the pros- pects of a high-carbon company – and investors would encourage the company to manage its risks by reducing its nega- tive emissions footprint; an inside-out approach flips this and recognises how a company’s own activities might be con- tributing to climate change or causing environmental damage. Investors using
34 | portfolio institutional | April 2022 | issue 112
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