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Will a new benchmark set the standard for ethical investing?

ethical investingA new benchmarking initiative is due to launch later this month attempting to boost trust in ethical investing.

Many still see the ethical investing label as too vague or complex. But attempts to remedy this have led to what seem like endless rating and data gathering projects to make things simpler and more transparent. Arguably, this has made things
more overwhelming.

The World Benchmarking Alliance launches on 24 September. It has come about from a partnership between the United Nations Foundation, Aviva, the Index Initiative and the Business and Sustainable Development Commission, which has developed a set of rankings that will show how companies are contributing to the UN’s sustainable development goals.

The results will be published as simple-to-understand benchmarks comparing the performance of individual companies, free for everyone to access and use. The WBA says it is targeted at investors, governments and consumers, and tries to make it easier to access and compare data on businesses’ performance in this area.
It hopes to incentivise companies to behave better by recognising their effort, or lack of effort, in achieving the sustainable development goals – the 17 aims agreed in 2015 by all 193 members of the UN.

Goals are for the year 2030 and include ending poverty, taking urgent action to combat climate change and promoting peaceful societies. These add weight to other definitions of ESG investing like that of the Global Impact Investment Network, which defines impact investments as “investments made into companies, organisations and funds with the intention to generate social and environmental impact alongside a financial return”.

PG Life, an impact fund launched by Partners Group in March this year, is one investment vehicle using the sustainable development goals to assess companies.
Partners Group says it will focus on investments that help alleviate poverty and promote good health, quality education, affordable and clean energy, and innovation in industry and infrastructure – aligning it to development goals one, three, four, seven and nine respectively.

Discretionary fund manager Whitechurch Securities’ managing director Gavin Haynes is optimistic about the clarity the WBA could offer the investment process.

He says: “Clearly defined benchmarks would be very helpful, especially when it comes to screening for socially responsible investing portfolios. I’ll probably be asking the company we outsource screening to if they will be using the WBA benchmarks.”

Haynes says getting a picture of company behaviour in terms of SRI can be quite “nebulous”. He also notes governments may use the WBA to incentivise good company behaviour with tax breaks, for example. Others, such as WHEB Asset Management partner and head of research Seb Beloe, are expressing more cautious optimism about the WBA.

He admits that although there are other benchmarks like the WBA, this one could be more robust because it has no profit-making agenda working in its favour.
But he explains his issue lies partly with the simplicity of the benchmarks: “These are high-level gradings which we have moved beyond so it is not something we would plug into our impact investing process.

“It is trying to be multi-stakeholder and take into account all sorts of shareholders and I don’t know if that’s something that is really practical. These things can end up being Jack of all trades and master of none.

“It will work as a screen for worst offenders, which is quite a low bar, but would be useful for people not sophisticated in this area, at the start of their [impact investing] journey.”

EQ Investors places an emphasis on finding fund managers who share the firm’s goal of investing in companies seeking innovative solutions to social and environmental challenges. It carries out its own analysis, firstly on impact generated by the core products and services of a company, then by measuring the added benefits of companies’ products through a review of more than 100 impact indicators. Executive director Jeannie Boyle says, like WHEB, the WBA may not easily slot into the firm’s existing processes.

However, she welcomes more use of the SDGs because of how this will help standardise the confusing rhetoric around ethical investing: “It is good the WBA is using SDGs as a measure of impact because if we are all using a similar framework it makes it easier for people to understand.

“One of the drawbacks for us would be that we are often looking at smaller companies than the very large ones WBA will focus on. I foresee this could help individuals making their own investment decisions.”

The scale of the institutions backing the WBA gives it a big headstart in getting investors to trust its ranking of companies’ contribution to the SDGs. But for those firms that have already become expert in investing for positive impact, the best they may gain from the WBA might be an aid to high-level conversations with clients and outsourced providers.

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