Asset managers need to do more to explain how sustainability measures actually benefit stakeholders, according to the Thinking Ahead Institute.
In its new report, Sustainability: Understanding impact and value creation, the institute warns that investment organisations need to be wary of the gap between their positive intentions for a more sustainable economy and their ability to deliver it.
Otherwise institutional investors risk a disconnect between ambition and reality if they focus on measuring investment impact without linking it to value creation for stakeholders.
The report also warns that asset managers need to be more realistic on what is actually achievable in terms of sustainability.
"Most investors tend to focus on the measurement of their impact but stop short when translating this into an evidence-based narrative that clearly explains how these sustainability metrics translate into value and outcomes for each stakeholder," said Marisa Hall, co-head of the Thinking Ahead Institute.
"Critically this should also include future expectations that can inform investors' deployment and stewardship of capital."
Companies in the sustainability impact working group involved in producing the report include AXA Investment Managers, Coronation Fund Managers, Dimensional Fund Advisors, the International business of Federated Hermes, First State Super, QIC and Willis Towers Watson.
To help bridge the gap the working group devised a scorecard to monitor value creation activities across a range of stakeholder groups and a four-step self-assessment framework to identify areas of desired improvement:
1. Identify who the key stakeholders are and understand their expectations and needs in order to determine what is valued.
2. Align organisational purpose with the desired outcomes by understanding which stakeholders the organisation prioritises.
3. Identify gaps between current practice and desired norms that align with the organisation's beliefs and value systems, evaluating these systematically through tools such as questionnaires and scoring systems.
4. Openly discuss the results and gaps to develop an internal action plan.
As a fifth step, the working group recommend that the output of this impact and value creation assessment should be communicated externally.
Hall said articulation by the investment industry of value creation linked to purpose and impact has been poor.
"But this is changing as stakeholders increasingly expect authentic, intentional and transparent communication of the value they can expect now and prospectively," she said.
"While challenging, we believe this can be achieved by using the integrated reporting framework or, in practice, producing an integrated report."