The investment industry is more focused than ever on sustainability. That does not, in itself, necessarily mean that the industry is becoming a force for positive change, of course. But it’s a start.
As so often is the case, there is something of a saying-doing gap. While some firms are focused on working out what to do, others are more concerned about creating a convincing story.
But there’s another gap, which is perhaps even more significant here. We might call this the doing-impact gap or, more technically, the intentionality-additionality gap. We may have certain intentions but how do we ensure that our actions create genuine and deliberate additions to what happens? This gap arises because it’s not easy to bring about fundamental and positive change or even simply measure it. After all, just how far is it really possible for asset management organisations to truly move the dial on climate change, for example?
The fact is, no single party on their own can achieve as much as all parties working together. But everyone can play a part. And this dynamic is neatly captured in what my colleague Roger Urwin has termed the 4-3-2-1 PIN code.
The 4-3-2-1 PIN code is an impact framework. The framework assigns 4 units of influence to public policy, which is the single most powerful channel for effecting change. Laws and regulations can directly affect the things that matter most: resource extraction, pollution, emissions and the many other inputs to and outputs of our economic activity that contribute to the sustainability or unsustainability of our economy.
But while public policy is the most powerful, it’s not the only channel. The 3 in our PIN code is for the influence of corporations. Corporations have a choice to make. One path is to focus on shareholder value and short-term profitability alone. They can choose to skirt the spirit of regulation. They can game the system, for example by regarding fines as merely a cost of doing business. Alternatively, they can see themselves as part of society, inseparable from the communities that they operate in, sell to and employ. They can reject the poisonous notion that they have no social responsibility beyond the maximisation of profits and instead pursue profits with purpose.
And the 2 in our 4-3-2-1 PIN code points to us in the influence of the investment community. Asset owners and asset managers lack the direct power of corporations to effect change, let alone the power of public policy. But investment decisions do have impacts. Asset owners and asset managers are stewards of the system. Shareholders who own, and profit from, corporations that pollute or exploit are not mere bystanders, they are active participants in the system and need to accept the responsibility that role brings. Intentionality on its own can too easily result in nice stories but no real change. Additionality demands that we invest in technologies that have a chance to make a real difference.
And the final unit of influence goes to the individual, the man or woman in the street. They exercise their influence as world citizens in a spectrum – consumers, workers, retirees, voters, travellers, campaigners, etc.
Hence, public policy; corporations; investors; individuals: these are the players in our 4-3-2-1 PIN code framework. Each has a role to play.
But the story certainly does not end there. The roles are interconnected. For example, individuals can influence public policy, hence having a bigger impact than is possible through their own actions in isolation.
The role of investors has arguably the most potential to connect these powerful forces. There are a legion of opportunities for investors to increase their impact by leveraging the 2 units of direct control into many more units by using their soft power to influence companies and public policy.
The intentionality-additionality gap (or, if you like, the doing-impact gap) represents the shortfall between our desire for a more sustainable economy and our ability to create it. The 4-3-2-1 PIN code is a reminder of the shared responsibility to unlock the impact that society is asking for and critically needs.