Keynote Listener: Dr. Marcel Malmendier

Financial Impact Assessment and Measurement

by Dr. Marcel Malmendier (Managing Director Qualitates GmbH, Investment-Advisor), Keynote Listener (Solution Stage: Measuring Social and Environmental Impacts for Better Investor Decisions) at the 8thInternational Conference on Sustainability & Responsibility in Cologne

At the 8th International Conference on Sustainability and Responsibility on CSR issues, some presentations also dealt with investments and finance. While the CSR discourse focuses on the practice of companies and organizations, the Sustainable Finance discourse focuses on the practice of the financial industry. Sustainable Finance aims at redirecting financial flows as an important lever to encourage companies to adopt more sustainable business models and practices, but also to make the financial system as a whole more solid and sustainable. The Solution Stage “Measuring Social and Environmental Impacts for better Investor Decisions” was based on this connection between capital and entrepreneurial practice.

Most interesting for me were the reports of two natural scientists on their projects to develop indicators for the effects of investments from the point of view of sustainability. The aim is to determine central correlations between certain business models on the one hand and their effects on the environment and social welfare on the other.

Vanesa R. Osuna is an expert in Water Technologies. She is Project Director at sequa gGmbh (Bonn) and Scientist at CUNY Advanced Science Research Center (New York). She has led the development of a methodology for measuring social and ecological impacts of global equities associated with water.

John Spengler is an expert especially in the area of air pollution health effects. He founded the Harvard Green Campus Initiative in 2000 and is, beside other roles, Professor at the Department of Environmental Health, Harvard T.H. Chan School of Public Health. His field of research includes the correlation between certain key figures of air pollution and key figures of health.

At the request of the large Dutch pension fund PGGM, UBS has set up a multi-year project to investigate the impact of its investments, in particular the following correlations: The link between investments in specific stocks and effects on water supply and quality, on health, on climate change and on food security. Vanesa R. Osuna and John Spengler are part of the project team along with several other scientists. Until the end of the project, the concrete findings will be exclusively available to UBS. However, the scientific findings can then be published in full. This was confirmed to me upon request. The framework of the research can be read in a first publication: “Scientifically asses impacts of sustainable investments”.

What is particularly exciting is that once these correlations have been scientifically researched and have become quantifiable, they can help investors and policymakers to make better decisions and to better enforce them.

From the perspective of Sustainable Finance, however, the contributions of the representatives of the major banks UBS and SEB somehow remain stuck in the common sense. On a CSR conference I would have expected more depth and more visionary ideas to transform the financial and real business.

The importance of ESG criteria (ESG = Environment, Social, Governance) for the management of investments, as well as a new set of risk indicators against the backdrop of climate change, overpopulation and other pressing environmental issues, is highlighted. The SDGs (= Sustainable Development Goals of the UN), with which concrete future issues are set on the agenda based on an international consensus, are mentioned several times. Several times both point out that the effects of investments should be measurable, because this would then be tangible and convincing. Theo Clement, UBS, in particular highlights the topic of impact investment as a new paradigm. Finally, it was made clear that the investment world is in transition, a movement that is still in its infancy, but which nevertheless already unfolds a certain power.

These points are undoubtedly all important. In the following I will list some of the missing issues and questions that are important in the discourse on Sustainable Finance and on CSR.

Question about the observation level
First of all, the question of the observation level arises when very general connections are made between equity investments and climate, environmental, health and nutrition issues. Are only macrophenomena observed here or can concrete microphenomena also be recorded? Certainly, there are some key technologies that contribute decisively to improvements, such as solar or wind energy. Certainly, there are other measures with a broad impact, for example in the health sector. In such cases of broad e.g. (bio-)technological impact, the distinction between macro and micro becomes less important, even if it does not disappear.

On the basis of general correlations, however, it will often not be possible to draw the conclusion that an equity investment has a concrete impact, at least if the focus is also on concrete micro-effects on a local scale. Aiming at concrete investment impacts tends to become more difficult if business models cover many and thus heterogeneous regions of the world, and if they are diversified across many fields of activity.

What role can knowledge of such general correlations play? In many cases, it will be an important heuristic, but often not an instrument for predicting impacts, as representatives of the investment world several times have stated in this solution stage. As a social scientist, I myself was involved in a research project on the question of impacts and can only say, that we should not overestimate the insights of general correlations. In the light of impressive insights on the macrolevel important questions thus may get out of focus. I would say: Macro-perspectives should always remain founded in micro-perspectives – and vice versa.

The question of the size and diversification of enterprises
The question of the level of observation also includes the question of whether one wants to invest in smaller or larger companies. In addition to technical investment questions about liquidity, performance and volatility of certain stocks and bonds, this is also always an impact question. An impact description with focused business models is simple and often practiced today, without exact research of general correlations like the ones mentioned above. Focused business models are usually found in companies with medium and low market capitalization. However, when talking about big money and investing billions and trillions of dollars in equities and bonds of major international corporations, such overarching correlations between business practices and their effects on climate, nutrition, health and water become unevenly important for the orientation of investors and policy makers.

Impact investment as a recourse to traditional investor mentality and as a possible impulse against speculation
As I see it, it would be helpful if today’s discourse on impact investing were placed in the context of the traditional foundations of investing. However, this is rarely done. In particular, the common opposition to speculation is interesting. Speculation is characterized by looking away from the concrete investment object (companies, organizations, projects etc.) and looking to objects such as charts, annual performances, etc. The question of impact has always been the central question of an investor. Today, new topics are being added, especially the consideration of social and ecological impacts, which are listed in the SDGs. At the same time, it should be made clear that the focus on investment impacts inevitably means refraining from speculative practices. This is certainly less in the interest of major international banks that have fired this trend for decades and thus generated immense turnover. It would have been exciting to hear the position of a small ecologically oriented bank that was invited but couldn’t attend.

A CSR-oriented view of the economy could help here. Such a view is always directed at the real economy: companies, organizations, projects, etc. The much larger investment volumes, however, have been coming from the area of derivative investments for many years. These instruments are often used speculatively: Investors often do not even know and are often not interested on which real investments (companies, projects, organizations, states, etc.) their derivative strategies are based on. There is still a lot of work to be done for a cultural change in the investment world. This topic was practically not addressed and so no reference was made to the fact that the industry will hardly be able to achieve this turnaround on its own. Experience in other branches shows this. Tough structural measures such as the separation of energy generation and networks or the separation of management consulting and auditing will be necessary to limit this investment machinery. The frequent reference in the Solution Stage to institutional investors increasingly asking concrete questions about what they are investing in is certainly correct. But it is still a fraction compared to speculative investments.

Measurement or Assessment: More than just a question of wording
The rationalists of this world sometimes spread the illusion, if one expresses it in cabaret style, as if what has not been measured does not actually exist. Against the background of modern science, a one-sided emphasis on measurement is simply not state of the art in today’s methodology. When one speaks of assessment, the perspective is broader. Measurements offer certain data qualities. Descriptions help to determine at all what should be measured. And descriptions help where quantitative data are problematic, for example when dealing with individual cases.

The danger that the focus is placed too much on measurability while neglecting the concrete understanding of cause-effect relationships should actually no longer exist today. Impact assessments and evaluations show the way: the understanding of correlations and quantifications go hand in hand.

The danger of a quantitative narrowing of perspectives was also noticeable in this Solution Stage as in many other discussions. The representatives of the major banks in particular sometimes seemed to be strongly affected by the paradigm of measurability. Linear thinking was to be recognized here more than once. From the point of view of the representatives of the natural scientists, however, it was important not only to see statistical correlations, but also to understand and describe the effects of investments and entrepreneurial action.

One example of quantitative and qualitative perspectives being mutually dependent became clear in the discussion when a listener asked about the social impact of microfinance. Of course, every connoisseur of this scene has many statistics at hand, but also material to describe individual cases and to tell typical stories whose information content is not reflected in quantum data. Some of the speakers noted that a purely quantitative approach is not enough.

Bochum (Germany), 20.11.2018
Dr. Marcel Malmendier

Interview with Cologne’s Mayor Henriette Reker: What about CSR in Cologne?

Since 2015, Henriette Reker has been the first woman to hold the office of Mayor of the City of Cologne. In this function, she is a member of numerous committees, associations and socie-ties in the region.

At the “8th International Conference on Sustainability & Responsibility” she welcomed conference participants from all over the world to Cologne and stated that the commitment to the United Nations’ SDGs is an important goal for the Rhine metropolis. In an interview, we asked her about the importance of sustainable urban development in Cologne, as well as concrete goals and measures.

1) What does sustainable urban development mean for you personally?
For cities, and even more a growing metropolis like Cologne, sustainability and responsible leadership are important success factors, just as they are for companies. Only if we plan, work and do business sustainably we will be able to master the challenges of a shared future.

2) In your opinion, does the city of Cologne take a leading role regarding “sustainable urban development” in North Rhine-Westphalia? What do you link that to?
When it comes to sustainability the same holds for cities as it does for businesses: The future and a good communal life can only be designed through dialogue and cooperation of all societal players. Therefore, the city of Cologne was the first in Germany to introduce guiding principles for civic involvement and participation.
Voluntary civic participation processes are rarely bound to legal requirements or standards of quality. For these new forms of participation to work as an enrichment and supplement to the democratically legitimized processes of discussion and decision-making, they need to be subjected to well-recognized and accepted “rules of the game”. Cologne’s “guiding principles of civic participation“ were developed by representatives of political bodies, the city administration and civil society. Starting in 2019, they will now be tested in a one-year pilot phase.

3) Which concrete goals for a sustainable urban development does the city of Cologne follow momentarily?
As a metropolis with over one million inhabitants, Cologne bears a significant responsibility to tackle the challenges of the 21st century – Be it regarding climate change, fair trade or the strengthening of human rights. In big cities, not only the major issues like greenhouse gas emissions emerge. Within them also lies the key for finding solutions by planning and regulating consumption of resources.

4)Which measures are taken to reach these goals?
With its resolution to support the millennial development goals of the United Nations, the Cologne City Council accepted the mission to design a sustainable urban development. It most recently accepted the resolution of the Association of German Cities for a “Sustainable Development of Municipalities” in 2017. It therewith committed itself to the Agenda 2030 of the United Nations, which especially needs to be brought to life through municipal participation and responsibility. This also means that the city of Cologne will need to evaluate any of its future measures regarding their ecological, economic and societal consequences and side effects: Which consequences does a measure have for the citizens of Cologne, for people in other parts of the earth, for the planet and for future generations?

5) The 8th International Conference on Sustainability and Responsibility brought the international CSR and sustainability community to Cologne this November. How important are meetings like this for the region and what impressions from Cologne do you hope the participants will take back to their home countries?
I am sure that the participants will have noticed: Cologne is in motion, in transformation, with the aim of preserving what is good and meeting new challenges with long-term effective measures.
For me, sustainability is also of central importance at the higher levels; it is the linchpin of city strategy, administrative management and dialogue with citizens. I am delighted that 8th ICSR – the leading conference for sustainable management in Europe – brought together so many international experts from science, business, politics and civil society in Cologne.

6) Looking to the future: How sustainable do you think Cologne will look in 40 years’ time?
The challenges of the coming years will undoubtedly be demographic change, the transformation of energy systems and immigration. In order to guarantee economic growth, environmental and climate protection and a fair social system in the long term, the city of Cologne needs a stable budget. If we succeed in continuously investing in the education sector, the integration of refugees and in infrastructure, I am confident that Cologne is well positioned for future developments. And that many more people in Cologne will be content and happy to live in our city.

7) Urban spaces will probably be home to 2/3 of the world’s population in the next 30 years. Where do you see the greatest challenges for the cities of the future?
The city of Cologne is facing many changes in the coming years: Strong population growth and changes in the age structure, climate change and climate protection, changing mobility needs, digitization and economic change are just some of the challenges facing urban development.