Regulators are right to focus on real-world sustainability impact

As 'double materiality' is rising up the regulatory agenda, how can investors define and measure real-world impact?

Spurred on by COP26, in recent months regulators and investors have begun to think about the real-world sustainability impact of financial investments.

Recent consultations by the UK Department for Work and Pensions and the Financial Conduct Authority on climate and investment reporting reflect this.

They show a marked shift away from how regulators have traditionally approached ESG-related financial regulation – what the European Commission calls ‘outside in’ – to ‘inside out’ (or ‘double materiality’).

Historically, the focus has been on protecting investments from the financial risks associated with sustainability – in particular, climate change.

This looks from the outside world to the investment decision, to understand how the sustainability transition affects risk and return. ESG integration is seen through the prism of risk management, and used to capture the way in which companies and funds respond to the transition.

This approach has an important role to play, evidenced by many companies changing their behaviour for the better due to an increased focus on ESG issues.

‘Inside out,’ or ‘double materiality’, however looks from the investment decision to the outside world, to interpret how that decision either contributes to, or hinders, sustainability goals.

This long overdue shift in approach is welcome.

Recent research by Edelman found that 69% of UK savers feel financial institutions, such as banks, insurance companies, and investment managers, have been culpable in creating the current climate crisis.

When asked who they think is most influential when it comes to forcing companies to reduce their carbon emissions, only 14% of savers said financial institutions.

These are depressing statistics.

A shift in focus could help to address greenwashing concerns and level the playing field.

Most importantly, it will raise sustainability standards – improving the extent to which the financial sector positively contributes to the transition. That may begin to address scepticism from savers about the role of financial institutions in driving sustainability.

We’ve considered the behaviours we believe regulation should incentivise. In particular, how investors can maximise their real-world sustainability impact?

When we invest, we consider two lenses, hence the ‘double’ of double materiality:

  1. Risk and return, which includes sustainability-related risks and opportunities
  2. Influence, which includes real-world sustainability impact

Institutional investors increasingly share this view, and want to incorporate both lenses into their investment process. Yet there is little clarity about what is meant by influence, real-world sustainability impact, and how to measure it.

Model of influence  

Consequently, we have developed our own ‘model of influence’. This comprises of three key areas of influence, based on how direct an impact these actions have.

Tier one 

The first tier of influence includes:

  • Supplying new capital, debt or equity to a company or government, where this has an environmental or social objective
  • Collaborative company engagement on sustainability-related topics, for example through the Climate Action 100+ initiative
  • Engaging with public policymaking to create a more sustainable economy, for example to decarbonise the electricity grid or rollout electric vehicles

Tier two

The second tier encompasses two key elements:

  • Engaging with companies as an individual investor on sustainability-related topics –less impactful than collaborative engagement, but this nevertheless has an important impact
  • Incorporating environmental and social-related objectives into mandates, as part of a scheme’s investment approach. This directs capital flow towards more sustainable businesses and away from less sustainable businesses, indirectly influencing their cost of capital and hence their competitive positioning

Tier three

The third tier of influence to achieve real-world sustainability impact is one many institutional investors are already using: integrating ESG factors into the buying and selling of securities.

Clearly, there is room for investors to go much further in using their influence to support the sustainability transition. The future of our planet needs greenhouse gas emissions to start declining immediately and steadily. For as long as that’s not the case, we have much more work to do.

In the weeks and months ahead, our model will undoubtedly evolve as we learn what is most impactful in practice. But we won’t change our resolve to drive positive change.

Our view is that sustainable investment should always be additive.

At Cardano, our New Year’s Resolution is to put real-world sustainability impact at the forefront of how we invest. It’s great to see other investors looking to do the same, and regulators seriously considering how they can help bring that about too.



Keith Guthrie is the Deputy Chief Investment Officer, Cardano  





Will Martindale is the Group Head of Sustainability, Cardano