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Measuring the true impact of Environmental, Social and Governance (ESG) investments is crucial to assessing the claims made by their promoters and comparing different opportunities. This is a difficult task but not impossible.


The biggest challenge facing investors in ESG-focused products or companies is how to measure their real environmental and social impact. Increasing amounts of data are available on carbon emissions, but there is less information on other environmental impacts such as biodiversity, and details on social outcomes are even harder to obtain. 

Another problem is how to weigh negative against positive externalities. How do you measure the impact of an investment that is good on some of the nine planetary boundaries identified by the Stockholm Resilience Center but bad for others?  

This is uncharted territory, but my view is that you need to start attaching dollar numbers to these things. This may involve uncomfortable questions, such as putting a figure on the value of a human life or the value of a forest, so not everyone will agree. But until we do these calculations, we will not be able to know the impact of different ESG investments and compare them properly. 

We have tried to do this at DBS Bank by developing an impact measurement framework with the Impact Institute, a social enterprise pioneering new standards in integrated reporting. This has enabled us to conduct pilot studies analysing the environmental and social effects of our lending in the automotive and palm oil sectors.   

DBS has also joined UBS, ABN AMRO, Danske Bank, Harvard Business School and the Impact Institute in the new Banking for Impact alliance, which aims to create new impact measurement and valuation (IMV) reporting standards for financial firms and enable them to measure the environmental and social effects of their activities. Banking for Impact aims to build an IMV approach that includes the quantification, valuation, attribution and aggregation of impacts for the financial sector. Such scalable standards do not yet exist for financial firms. However, recent Harvard Business School research monetizing the impacts of over 1,800 public companies’ operations revealed a significant relationship between negative environmental impacts and lower stock market valuations. 

“Impact measurement can be an effective tool in overcoming greenwashing and finding out whether products have been launched more for marketing purposes than because of a drive to deliver positive social and environmental outcomes ”

Impact measurement can be an effective tool in overcoming “greenwashing” and finding out whether products have been launched more for marketing purposes than because of a drive to deliver positive social and environmental outcomes. If it becomes clear that the commitment to ESG is only skin deep, then investors need to have their guard up. 

Taxonomies of what constitute green investments can also provide a strong defense against greenwashing. Such frameworks have been developed by the US, EU, Singapore and Malaysia. It would be useful to have as much alignment as possible between different regimes, but it may not be possible to develop a single global taxonomy because definitions may vary between developed and developing economies and the bar should not be set so high that it discourages European investment in Asia, for example. Taxonomies will also inevitably need to evolve over time as countries progress in their transition to a net-zero economy. 

It is also important to recognize the difference between ESG investments and impact investing, which lie at different points on the investment strategy spectrum, between traditional investments at one end and pure philanthropy at the other. 

While impact investing puts impact before financial returns, ESG investments prioritize profitability, with positive social and environmental effects seen as a nice add-on. They have to increase revenue, reduce risk, reduce cost or improve reputation for those making the investment. And they may just involve screening for positive or negative factors to ensure that an investment is future-proof, devoid of reputational risks or simply likely to benefit from ongoing trends. This might mean investing more in pure electric vehicle-OEM companies, rather than internal combustion engines, because of the shift towards electrification, for example. 

Inevitably, the real impact of ESG investments will therefore be lower than that of impact investing, which may focus on areas of greatest need such as projects for primary healthcare and primary education in sub-Saharan Africa and Southeast Asia that are not investment options from a conventional financial perspective. 

“It is also important to recognize the difference between ESG investments and impact investing, which lie at different points on the investment strategy spectrum, between traditional investments at one end and pure philanthropy at the other”

Investing in ESG-focused products or companies is also subject to a number of pitfalls. One is to gauge an investment’s ESG credentials by relying on a single measure, such as one of MSCI’s ESG indices or research firm Sustainalytics’ ESG ratings. The logic for doing this is reasonable when an investment manager may not have the resources to do their own research, but the alignment between such indicators and the investor’s values is often low, so an investment that may appear ESG kosher may well not correspond to their targets.  

A second is that ESG ratings tend to score companies which provide a lot of information on their sustainability performance more highly than those which communicate less, even if the information given by the more active companies is negative. Large companies with big marketing and communications functions may therefore appear more attractive than less sophisticated companies with fewer resources and no formal ESG policies, even if the latter are performing better in reality. 

A third is a tendency to focus on environmental factors and overlook social impacts, whereas true ESG investments require a balance between the two. This is partly because it is much easier to measure the environmental aspects of an investment, but also because any investment manager setting up a new fund will want to focus on topical issues, and climate change is quite literally flavor of the month. 

The governance element of ESG should also not be forgotten. Good governance is often just seen as a basic prerequisite, but it affects how companies deal with the other two aspects of ESG, and poor governance can be the source of serious problems such as tax scandals, so it cannot be overlooked. 

Meanwhile, for banks such as DBS it is important to focus on helping clients improve the impact that their activities have, and not just support those who have already made great strides. In environmental terms, it is not a question of whether companies are green or brown right now, but what their targets are for getting from A to B. DBS has therefore put in place a transition finance framework to underpin this lending and has set a target of concluding S$50bn (Singapore dollars) of sustainable finance deals by 2024 to help customers integrate sustainable business practices. 

Mikkel Larsen

Chief Sustainability Officer, DBS

Mikkel Larsen is Group Chief Sustainability Officer at DBS Bank and interim CEO of Climate Impact X, a new global carbon credits exchange headquartered in Singapore. He was previously CFO for Asia Pacific at UBS and has also worked at Citigroup in London and KPMG in London and Denmark. He is an adjunct professor at the Copenhagen Business School, and has an MBA from London Business School, graduate education from Harvard University, a master’s in sustainability leadership from Cambridge University, as well as master’s and bachelor’s degrees in economics from Copenhagen Business School.