ESG (environmental, social, and corporate governance) investing has faced challenges in terms of transparency and inconsistent metrics, making it difficult for investors to accurately assess the impact of their investments. However, San Francisco-based asset manager Newday Impact Investing believes that the use of an Ecological Benefits Framework (EBF) could provide a new approach to social investing. This article explores how EBF offers a more comprehensive overview of a business’s true effects, compared to traditional ESG investing.
Newday Impact Investing focuses on environmentally and socially responsible portfolios, and they argue that EBF offers a holistic model to evaluate the social aspect and impacts of a business. EBF, created by Douglas Gayeton, co-founder of The Lexicon, considers six elements: air, water, biodiversity, healthy soils, equity, and carbon. By incorporating these elements, investors can gain a deeper understanding of a company’s overall impact on the environment and society.
Newday Impact Investing adopted the EBF in October, making it the first institution to utilize this “shared market architecture” in their investment process. Unlike traditional frameworks, EBF aims to provide an integrated ecological standard, addressing the challenge of varying interpretations across different organizations. This standardized approach streamlines the evaluation process, allowing for a more consistent understanding of sustainable investments.
While many ESG frameworks provide cumulative scores, Newday Impact recognizes the drawbacks of this approach. CEO Doug Heske points out that an all-encompassing score fails to capture the nuances and different impacts of a project in various geographies. The EBF framework, currently, does not create a cumulative score. Heske believes that in the current ESG environment, relying solely on a score can lead to assumptions and overlook critical aspects of a business’s sustainability efforts.
Newday Impact’s portfolio holdings include healthcare company McKesson, which underwent evaluation using EBF metrics. The assessment revealed the following findings:
– Carbon: McKesson has set science-based targets (SBTi) to reduce greenhouse gas emissions and have their suppliers adopt similar strategies.
– Equity: McKesson demonstrates a commitment to diversity, with a significant representation of women and people of color in its board and supporting underserved communities through grants.
– Healthy soils: Efforts to reduce paper waste not only saved millions annually but also reduced carbon emissions and protected trees.
– Biodiversity: McKesson’s paperless invoicing initiative resulted in substantial paper and carbon dioxide (CO2) emissions savings.
– Water: McKesson’s offices and distribution centers adhere to energy and environmental standards, considering aspects such as LEED and WELL Building Standards Areas.
– Air: Sustainable packaging and waste reduction initiatives contribute to reducing cardboard usage and diverting waste from landfills.
Through the application of EBF metrics, investors gain a more comprehensive understanding of a business’s sustainability performance across a range of environmental and social factors.
The use of EBF not only provides a comprehensive evaluation but also expands carbon markets. Heske highlights that a diversified view of project impacts can enhance carbon markets by enabling companies to trade carbon credits and offset their greenhouse gas emissions. However, it is essential to acknowledge the concerns surrounding carbon offset markets, such as over-crediting projects and insufficient offset schemes. To address these concerns, Newday’s goal is to build a measurement, reporting, and verification (MRV) library that investors can access for informed environmental decision-making.
Newday Impact plans to leverage technology, such as blockchain and machine learning, in the EBF investment construction methodology. These technologies can enable the analysis of large databases and provide more substantial conclusions. Additionally, Heske considers collecting data on client behavior to create a “values alignment profile” based on broader demographic categories. These technological advancements aim to enhance the effectiveness and scalability of the EBF framework.
The Lexicon plans to launch an “EBF Commons” in 2024, creating a platform for analysis, investments, and government agencies to share information and insights. This collaborative approach will enable a collective decision-making body to navigate regulations and increase interoperability across carbon marketplaces. Over time, Newday Impact intends to extend the application of EBF to its private equity projects, further ingraining sustainability considerations into their investment strategies.
Heske believes that EBF has the potential to pave the way for markets-based solutions and effectively communicate impact to clients. By harnessing the power of EBF, investors can gain a deeper understanding of the positive influence their capital can have on companies, projects, and nonprofit organizations. Heske envisions a future where EBF is widely recognized and embraced, empowering individuals and organizations to align their investments with their values seamlessly.
ESG investing has long grappled with a lack of transparency and inconsistent metrics. The Ecological Benefits Framework (EBF) offers a new path forward for social investing, providing a comprehensive evaluation of a business’s environmental and social impact. Newday Impact Investing is leading the way by adopting EBF and leveraging its insights to make informed investment decisions. With the potential to enhance carbon markets, leverage technology, and create a collective decision-making body, EBF holds promise for the future of sustainable investing.
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