[caption id="attachment_929837" align="alignnone" width="839"] -[/caption]
“Mandate impact disclosure to achieve the sustainable development goals (SDGs) and accelerate behavioural change in capital markets” is the first recommendation from the Impact Taskforce (ITF), an independent, industry-led taskforce supported by the G7 Presidency, published on December 13.
The Rt Hon Nick Hurd chaired the ITF and brought together 120 leading voices from business, investment and public policy, representing over 100 institutions across 40 countries. The mandate of the ITF in answer to the critical question: how can we accelerate the volume and effectiveness of private capital seeking to have a positive social and environmental impact?
The chair of ITF Workstream A, which developed this first recommendation, was Douglas Peterson, president and CEO, S&P Global. The recommendations of the ITF are transformational, as they move the purpose of accounting towards impact value generation for people and planet.
For the world to achieve SDGs, there will never be enough public money. According to a new report by the Climate Policy Initiative, investments must increase by at least 590 per cent to US$4.35 trillion annually by 2030 for us to be able to meet the climate objectives, maintaining a 1.5-degree C pathway (the Paris Agreement, SDG 13).
It is anticipated that the funding should come from such sources as corporations, households and individuals, commercial state-owned, and development finance institutions, and government budgets. Given the scale and the risks involved, co-ordination, policy, legislation, regulation, harmonisation, standardisation, and assurance are all needed in order to scale up fast.
Moving beyond modern portfolio theory
What are the (financial) reasons that investors are increasingly addressing issues such as climate change, gender diversity, mining safety, governance of technology, etc?
For Jon Lukomnik and James Hawley, a large part of the answer lies in the demise of the “perfect myth” that ruled capital markets for the past 70 years: modern portfolio theory (MPT). Economist Harry Markowitz introduced MPT in 1952, and later received a Nobel Prize for his contribution. It was a powerful framework for how to assemble diversified portfolios of assets in a way that they maximise returns for any given level of risk.
The underlying assumptions of MPT have been debated for a long time, because it has been shown they do not reflect important realities. Nevertheless, the theory was able to explain about six-25 per cent of variability in returns associated with the idiosyncratic risks associated with individual firms and the specific conditions they encountered. On that basis, MPT has produced impressive results. Whole industries developed around pre-packaged, diversified products, such as mutual funds (think, for example, of Unit Trust Corporation).
[caption id="attachment_929836" align="alignnone" width="1020"] Chart shows climate investment needed by 2050. - Source: Climate Policy Initiativ
