A tool that measures the impact of a company's activities on the environment and public health and rates it as good or bad is just around the corner.
UBS Asset management is working on a rating system which will assess whether a company has a positive or negative impact on the world, making it far easier for even hard-nosed performance driven investors to channel funds into companies that are environmentally and socially sustainable.
The sustainability tool is expected to be unveiled in 2017. Even though sustainability reporting is compulsory, it's hard to assess or verify the claims companies make about their environmental record, social programs and community work.
Armed with a PhD that blends capital markets and environmental health, and several decades of experience in sustainability, Dinah Koehler, director, sustainable equities at UBS Global Asset Management along with her colleague Bruno Berocci, managing director at UBSAM, and researchers at the City University of New York and Harvard University, are developing metrics which rate a company's net impact not just in environment, but also water and public health. The researchers will develop models and mine publicly available data from companies and government agencies.
"What a company does, the outputs, can be products, services. That's the good stuff, that's the benefit," says Koehler. "The cost could be the damage to the environment or humans associated with the production of every unit.
"The underlying principle is no company is risk-free, no company is squeaky clean, no technology is squeaky clean, so it is naive to be an impact investor and ignore the costs."
Positive impact
UBS asset management's work in this space was triggered by a request from PGGM, the huge Dutch industry pension fund for health care workers, nurses and doctors. PGGM members had asked the pension fund to find investments that were having a positive impact on climate change, water, food security and health.
"Bruno texted me, I will never forget this, and I wasn't even on the payroll. 'Can we measure impact?' I texted back, 'Yes, we can,' channelling Obama," says Koehler. "I know we can do it and I basically did it for my dissertation. I've been waiting for 13 years to bring it to life. The frameworks are there, the science is there, the knowledge is there.
"Then Bruno said, 'OK, let's start.' I said: 'Let me come up with something.'"
Koehler called her PhD supervisor at Harvard and I said, "Jack, I have got this situation. This is what I'm thinking, you got somebody who can work with me on figuring out how to measure the social impact of climate change?"
The sustainability rating would balance the good the company does in terms of human wellbeing and environmental quality, against negative impacts such as the bad impact it has on the environment or public health.
For example, UBS would look at companies that have a fairly sizeable portion of revenue associated with energy efficiency products such as wind farms or solar. "You will have companies who build wind turbines which, when deployed in the field displace dirty fossil-fuel energy, says Koehler. "That means that there's less air pollution, that means there's less CO2. Air pollution, smog, translates directly into human lives affected, into asthma cases, cardiovascular distress, premature deaths.
"It's just a matter of translating environmental damage into human lives into economic output and there's multipliers. So many pounds of toxic chemicals or air pollution because of the concentration of the air pollutants in the air kill so many people. We can turn a ton of carbon to lives impacted, premature deaths."
Economic value
In China, for example, she says, the biggest driver of climate change policy is air pollution because 1.7 million deaths a year are linked to air pollution.
In the US, the value of a statistical life is about $9 million. To put a value on the economic impact you multiply that figure by the number of lives affected by the factor you're measuring, Koehler says.
Emissions could be balanced by a company's direct efforts to rehabilitate the environment, build renewable energy infrastructure or strengthen human and social capital.
"We think that we can make a difference in terms of how people understand corporations," says Koehler. "This has not been done at the scale that we're doing it on, because we need to be able to understand hundreds of companies, and because we would like to have a big, broad universe to select from.
For companies such as Coca-Cola, the negative impact of its sugar-laden drinks on obesity, diabetes and public health would heavily impact the company's rating, she says. "That sugary stuff is killing people. They need to get out of that crap."
Hesta and UniSuper are among the super funds that have spoken to UBS about its new sustainability rating system.
Since 2014, the ASX and the Australian Securities and Investments Commission have required listed companies to disclose non-financial and sustainability related risks that may affect financial performance.
Environmental sustainability includes the ability of a listed entity to continue operating in a manner that does not compromise the health of the ecosystems it operates in over the long term; social sustainability is the ability to continue operating in a manner that meets accepted social norms and needs over the long term.
