Beyond ESG: Putting the Emphasis on Real Impact

ESG has arrived at a juncture where a broader, more complex view of wealth creation and capital formation will be needed to achieve its objectives, said Pavan Sukhdev, CEO of GIST Impact: “I think the time has come to look somewhat beyond ESG, if you like, and look at impacts” – the real-world effects that corporations have on human well-being.

“So the question is, can we change this neoclassical economy of ours into what we call an impact economy?” asked Sukhdev in a conversation with Julie Hudson Senior ESG Advisor, UBS Global Research, and founding member of UBS’s Sustainability and Impact Institute, and Leeds University professor Piers Forster. “We measure it now through profits, which means looking only at the narrow lens of financial performance, and not at its impacts on the human capital of employees, or the natural capital of the world, or indeed, social capital, the relationships between societies and economies.”

For an impact mindset, “it's not just about GDP growth, which is value addition in economic terms, but it's also about inclusive wealth, in other words, natural capital, human capital, social capital, and how that changes,” he said. Sukhdev noted that it’s increasingly possible technically to estimate and value in monetary terms the impact of companies’ activities across those four categories of capital over time. This suggests that a focus on impacts would be a better guide to where capital should flow to have the most benefit over the long haul for all stakeholders.

By focusing on impact, investors and policy makers can cut through the sometimes inconsistent and confusing array of ESG data and rankings. The push to “productize” ESG investing has led to a “shambles” of data and indexes, Sukhdev said. There are more than 150 organizations issuing ESG ratings and more than 600 different ratings for evaluating portfolios or companies, he noted. “While ESG ratings are good to learn about the risks and the opportunities in a particular space or a sector, they don't tell you how sustainable a company is.”

Total assets being invested on an impact basis remain quite small relative to the capital deployed in the world’s equity and fixed-income markets, Sukhdev noted. He cited figures that showed about 1,720 firms had about $715 billion of assets invested on an impact basis, while global public debt and equity markets have total value of upwards of $220 trillion. That leaves vast scope for introducing investment strategies that focus on impact factors, not just companies’ financial drivers.

An essential feature of an impact mindset is a long-term timeframe, noted Forster: “If you’re investing for short-term financial returns, you’re not going to make sustainable choices.”