A driver of world change, or just a marketing tool?

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SINGAPORE (Dec 7): While investing with an eye on environmental, social and governance (ESG) principles is becoming a trend, measuring the extent to which companies ‘do good’ is tricky.

Many funds do not track or measure the actual impact of their investments. Unlike measuring investment returns, doing good means different things to different people.

According to the Global Impact Investing Network (GIIN), impact investing is about driving positive social and environmental changes while making financial gains. The causes range from financial inclusion and affordable housing, to clean water and alleviating poverty. 

However, scoring the ESG performance of a company seems highly subjective as there is currently no widely acknowledged benchmark to gauge companies’ ESG performance. . 

For now, organisations such as GIIN and the International Finance Corp have come up with definitions, or some baseline values, of what comprises impact investing. There is also space for audit firms to step in to help sustainable investment products comply with common standards — but this area is extremely nascent.

The most widely used sustainable investing strategy globally is still exclusionary screening, according to the Global Sustainable Investment Alliance.

This single strategy covers some US$15 trillion of investments. Another widely used strategy is the so-called “best-in-class” approach, though some fund managers point out that it has little to do with impact, and is more about risk mitigation. 

The scope and definition of sustainable investments can vary, making it even harder to measure.

This is made more difficult in emerging markets where a company setting up a new factory can claim it is doing good by offering jobs to the rural poor, or a company uses digital technology to provide extra revenue to communities as a form of social impact.

How does one determine if a business is really sustainable, or not? This week in The Edge Singapore, we speak to various fund managers on how they measure impact in the fast-growing sustainable investing universe.

Read more in our story, Can your investments fix the world? in issue 860 of The Edge Singapore (week of Dec 10), which is available online for subscribers and in print at newsstands.

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