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The investment industry has a big opportunity to support the transition to a more sustainable future. A focus on sustainable outcomes is driving much of the discourse in the area of responsible investment and stewardship. In this article, we take a closer look at outcomes and how they can be reported on in practice.
An outcome sounds quite straightforward – it’s simply the way a thing turns out.
Outcomes are something we all understand either as a consequence or result of an action or situation. So why is it that in the realm of sustainable finance, so much attention is being given to defining outcomes and how they should be reported?
If you’ve been following recent developments in the ESG investment landscape, you’ll no doubt have noticed the word “outcomes” feature on a regular basis: Sustainable outcomes; SDG-aligned outcomes; Stewardship outcomes; Investment outcomes, the list goes on.
Investors are more than ever expected to shift their focus towards the real-life impact of their responsible investment and stewardship activity. The Principles for Responsible Investment (PRI), in its Active Ownership 2.0 framework, recommends that investors prioritise critical systemic goals and collective effort aimed at concrete outcomes, rather than processes and activities or narrow interests.
The introduction of ambitious disclosure and fund labelling rules has no doubt helped to bring outcomes to prominence. Investors bound by the obligations of the EU Sustainable Finance Disclosures Regulation (SFDR), signatories of Stewardship Codes - as well as those being affected by the proposed UK Sustainability Disclosure Requirements (SDR) – now need to be clear about the intentions and consequences of their investment and engagement activities.
While the above standards are not fully aligned in their frameworks, they share the goal of fostering enhanced transparency, which will lead to improved comparability and understanding. It is the start of a more dedicated effort to be clearer about the “so what” of sustainable investment in the long term.
Below, we take a closer look at the different shapes of outcomes and practical ways of capturing and measuring them.
In the UK, a robust set of stewardship principles have been codified into the Financial Reporting Council’s (FRC) UK Stewardship Code. Its 236 signatories represent over £40tn of assets under management, and this continues to increase year on year. By committing to the Stewardship Code, signatories are pledging to improve the quality of their engagement activities and are required to put an emphasis on outcomes.
According to the FRC, “stewardship is the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries, leading to sustainable benefits for the economy, the environment and society”.
It is quite involved when you let it sink in: investors are expected to consider sustainability end-goals throughout their entire investment process: where they allocate their funds, how they manage them day-to-day and how they oversee their investments as active owners.
That’s why the threshold for applications to become a UK Stewardship Code signatory was a hard one to get through. In 2021, the applications of 64 firms - some of the biggest names in investment management - were rejected. In 2022, of 105 applications, just 74 made the grade. Describing processes and procedures doesn’t cut it anymore. Actions and outcomes are what matter most.
While the FRC has acknowledged improvements in reporting standards across the industry - including in relation to Fixed Income and Real Estate - the job is far from complete.
Moving forward into 2023, the FRC’s increased emphasis on reporting of activities and outcomes will be integral to its assessment process. High standards of reporting are expected across the Principles. For Principles 4 and 7 to 12, signatories are expected to produce multiple case studies, to demonstrate which activities have been undertaken in the reporting year - alongside their respective outcomes (both good and bad). For larger asset owners or asset managers, more examples will be expected to be included.
More examples need investment, stewardship and reporting teams to work together to ensure that the allocation, management and oversight elements are covered holistically. Larger organisations have more data to begin with, adding complexity to an already demanding series of requirements.
That’s why it is essential to take control of this data and use a stewardship management system like Impactive to help track engagements and define clear outcomes for easier reporting.
How to capture this: The simple answer is that you need a system to help you track this activity. The Impactive platform allows you to connect investment decisions with granular ESG data, engagement and voting activity.
How to capture this: If you are tracking your engagements and are able to monitor their progress, with a clear audit trail of activity, then making decisions on escalation activities becomes much easier. The Impactive platform allows you to tag any activity with an escalation workflow and to set clear, time-bound objectives.
How to capture this: An engagement tracking system such as Impactive allows you to record your interactions with service providers too, saving you time and effort when it comes to reporting or decision-making.
These are just a few examples, and in reality, there can be many other forms of outcomes. Once you have outcomes as your guiding light, everything falls into place.
Under the proposed SDR by the UK’s Financial Conduct Authority (FCA), financial products will be labelled on the basis of their intentions and the primary channel that they can plausibly contribute to positive sustainable outcomes. Products can gain one of the following three labels based on their environmental or social aims and impacts:
For an asset to achieve a sustainable label it must meet strict criteria relating to investment policies and strategies, KPIs, governance, and investor stewardship. Funds will have to supply evidence of sustainability objectives, approaches and performance, evidenced in a series of disclosures available to investors as part of the SDR reporting process.
For the Sustainable Improvers label, the evidencing of specific and measurable outcomes of stewardship activities will be particularly important.
The SFDR is an EU legislation that requires asset managers and investment advisers to provide firm- and product-level disclosures on how they address two major matters: Sustainability Risks and Principal Adverse Impacts (PAIs). It also looks to help investors in selecting between funds by categorising funds into three groups, based on their degree of sustainability importance. “Shades of green” categories correspond to Articles 6, 8 and 9.
The ability to address sustainability risks and reduce PAIs will require careful policy-making, genuine engagement and effective implementation, by those responsible for managing such investments. Disclosures will need to evidence these activities and outcomes.
While engagement outcomes for SFDR aren’t as clear-cut as in the SDR and UK Stewardship Code, there is still a requirement to publish an engagement policy and obligations to monitor investee companies and engage with them to reduce PAIs.
Let’s look at an outcome as the exciting part of stewardship. It is where internal planning meets a decision, resulting in actual impact. However, it is a broad term and can refer to lots of things.
This breadth is part of the problem. How can you know your outcomes have improved if you don’t measure them? Accurate and transparent reporting is the only way clients can know how well their money is being invested from an ESG standpoint. Successfully reporting outcomes are a testament to the integrity of an organisation. It leads to certainty surrounding compliance and helps internal teams to process data comprehensively. Clients also know their investment firms are fulfilling ESG obligations.
Without effective reporting, outcomes cannot be properly measured. Without measurable outcomes, a company cannot assess its own progress. Hard-won ESG policies become impossible to quantify. Lacklustre commitment to outcomes results in siloed teams, disappointed clients and concerned regulators.
Companies have an overwhelming amount of data to map, capture and evidence. Despite this, reporting is a necessary part of the modern management process. How firms report depends on the quality of their processes and the technology at their disposal. Impactive is designed to transform how asset managers and asset owners manage their ESG activities. More specifically, it’s a centralised digital workspace, where investment, ESG and reporting teams work together in harmony to handle their stewardship duties.
Truly impactful stewardship outcomes will only be possible when firms are fully aligned, as a result of eliminating knowledge gaps and inefficiencies. Impactive is custom-built to capture the information users need, translating it into crystal-clear data. This data is then readily available to all relevant teams. For asset management companies, fund managers and ESG teams are suddenly on the same page - all of the time.
Ultimately, Impactive has the right expertise on that key element of reporting to build trust. We want to enable asset managers and owners to work as effectively as possible, to manage and leverage their ESG insights, with the aim of thriving under an increasingly challenging and dynamic regulatory environment.
If you have any questions or comments, we’d love to hear from you! Get in touch with us at info@impactive.pro
Impactive is the first digital workspace designed to bring investment, ESG and reporting teams together seamlessly. Book your 30-minute demo here to see how it can transform how you work.
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