Insights

A 3D view of sustainable investing

Asset managers tend to visualise different sustainable investment approaches as distinct points on a spectrum. But is the real picture so straightforward?

Data and complex relationships are often best expressed visually. Our brains are wired to understand a diagram rather than text. Diagrams can become iconic (where would Maslow be without his pyramid?) and bring a theory to life.

Sometimes, however, our desire to find the elusively perfect illustration of a theory leads to shortcuts and blindspots that undermine our understanding of what it’s trying to depict.

Finding the holy grail of sustainability diagrams

The sustainable investment industry has witnessed a widespread hunt for the holy grail of diagrams.

Why? Put simply, it’s a messy landscape.

As explored in last week’s blog, people in our industry use different labels to describe the same practice and create new labels for something that’s already been christened. If you browse any selection of asset manager websites, you’ll find different firms apply the terms responsible, sustainable, ESG and impact to different investment approaches.

To help illustrate what they mean, many now use a nice, neat diagram to organise their sustainable investing approach.

But in an effort to inform, these illustrations can oversimplify what is, unfortunately, a complicated sector.

Here are a few of the most common ‘continuums’ we see.

The returns continuum 

This diagram, first published by the Omidyar Network, does a good job of elucidating the relationship between impact and returns. By-and-large, it holds true. There are, however, nuances and exceptions to this rule.

The commitment continuum

This is a representation of many of the diagrams that feature on asset management websites. From left to right, it shows the level of active commitment a manager or fund has to responsible investing, starting with simple screening and ending with direct and measurable impact investing.

Moving from a 2D to 3T perspective

The problem is, no one continuum tells the whole story. For a truly holistic and unconstrained view of the sustainable investment landscape, we believe investors should take a three-dimensional perspective.

1. Time 

Like financial returns, the impact you can achieve depends on the tenure of your investment.  

Although a long-term approach to investing is best, it’s not always possible. Investors must align their approach to impact with their investment horizon.

Investors taking a long-term (i.e., generational) view might consider a direct and systemic impact approach. For those investing over a shorter period, a light-touch, screened or outsourced approach makes more sense.

2. Type

The impact you can achieve also depends on the type of market in which you operate.

If you run a private-market impact fund, for instance, you can achieve direct impact by supporting specific interventions with measurable non-financial returns. If you invest in public markets, the tools at your disposal are more nuanced: engagement, exclusions and positive screening are the most commonly wielded.

Given the composition of investable assets is unlikely to change in the near future, it’s important to identify the best solutions for each investment style and reward investors who have an effective responsible investing strategy across each asset class.

3. Tools

Investors have plenty of tools at their disposal to become brilliant responsible investors. Best of all – and contrary to what many believe – they aren’t mutually exclusive. These tools fall into three broad categories, and can be applied across all asset classes.

An alternative view

We spend a lot of time trying to formulate a better representation of what it means to be a brilliant responsible investor. Always, we come back to this illustration.  

Importantly, it accounts for each of the 3Ts. It encapsulates both the tools at our disposal and the commitment to these tools. It acknowledges the constraints of investment horizon. It considers the type of investor. And it helps us visualise an investor’s place in the sustainable investment journey.