Jean Rogers, SASB: My response to investor reporting on both portfolio and systems-level performance

Finance must keep pace with a changing world

Jean Rogers
Jean Rogers

Have your say: comment on this response and the original article: ‘It’s time for investors to start reporting on both portfolio and systems-level performance at RI’s Linked-in site

The world of today bears little resemblance to the one of 1952 when Modern Portfolio Theory was born, or even to the one of the 1970s, when it was widely adopted. Twenty-first century investors face unprecedented risks and opportunities; from climate change and resource constraints to technological innovation and interconnected global markets.
Prevailing wisdom suggests these systematic market forces are beyond the influence of investors and therefore not relevant to portfolio construction. However, as The Investment Integration Project (TIIP) points out in “Portfolios and Systemic Framework Integration: Towards a Theory and Practice,” this is an outdated premise on which to base investment decisions. Our environmental, social, and financial systems are interdependent. Efforts to maximize portfolio returns can and do impact the stability and resiliency of ecological and social systems. And economic growth cannot be sustained if the underlying forms of environmental and social capital upon which it depends are depleted.
As the world evolves, the ideology and infrastructure that govern our financial markets must keep pace.
That’s part of the mission of the Sustainability Accounting Standards Board (SASB). SASB represents a natural evolution of the U.S. capital markets, where ideas about corporate disclosure predate even Modern Portfolio Theory. Rooted in the Securities Acts of 1933 and 1934, federal disclosure requirements were established to protect investors in a time when they had limited opportunities, relatively few assets, and dealt in individual securities.
The advent of the Financial Accounting Standards Board (FASB) in the 1970s was an important milestone, bringing much-needed standardization to financial reporting, which supplied investors with comparable, decision-useful financial information about the companies they might buy, sell, or hold. But today’s investors – many of them “universal owners,” whose holdings represent a slice of the entire economy – need a more complete picture of corporate performance than financial statements alone can provide. SASB aims to fill that need.As global economic and financial systems become more integrated, how are commercial banks addressing systemic risk management? How are insurance companies considering the increase in extreme weather events when managing risk, planning capital adequacy, and underwriting contracts? As more humans are exposed to resistant strains of bacteria, how are meat, poultry, and dairy companies managing antibiotic use in animal production? These issues impact portfolios – and vice versa.
That’s why SASB develops sustainability accounting standards that help companies disclose decision-useful information to investors on the sustainability topics that are material to their businesses. As TIIP notes, “sound investment decisions … depend on accurate market prices.” The data yielded by SASB standards will help the market understand and more efficiently “price in” performance on these factors. With financial and sustainability fundamentals presented side-by-side, investors will be better able to understand the impacts of environmental, social, and governance issues on their portfolios. Conversely, they will also be better equipped to understand the impacts their portfolio-level decisions have on crucial systemic frameworks.
For example, climate change impacts 91 percent of the industries in a diversified portfolio. Climate risk, which results from carbon levels that exceed the atmosphere’s absorption capacity, creates correlated but differentiated effects across those industries, affecting investment returns. In turn, investor actions can also affect the system. Investing in carbon-intensive companies and industries, for instance, can exacerbate the problem for both the investor and society at large.
Traditional approaches to investing pit business against society and value against values. But finance is not a zero-sum game. The success of long-term investments is inextricably bound up with the health of our basic ecological, social, and economic systems. By considering the bi-directional relationship between investments and the systems upon which they depend, investors can usher in a new era of sustained and sustainable long-term returns. The work of The Investment Integration Project (TIIP) represents a crucial step toward that future.

Jean Rogers, PhD PE, is Founder and CEO of the Sustainability Accounting Standards Board (SASB)

Have your say: comment on this response and the original article: ‘It’s time for investors to start reporting on both portfolio and systems-level performance at RI’s Linked-in site

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