12.2.3 An integral perspective

The analysis of the market for BES information products revealed a number of hurdles that must be overcome to allow the market to realise its full potential. There were indications that a number of these barriers are interrelated. For that reason, it is important to apply an integral research perspective to the market, the actors and their interests. In order to visualise the interdependencies, a system diagram1 will be presented to illustrate the cause-and-effect relationships. This can be used to anticipate developments and the effects of interventions.

Figure 12.3 includes two types of effects and an indication of whether effects reinforce each other:

The following summary will explain the information and arrows in the system diagram.

Firstly, the concept of BES should be understood before it can be assessed what its financial impact is on business organisations and investments. The clearer the understanding, the more transparent the financial impact of BES on companies can be made. More transparency will cause more investors to integrate BES factors in their consideration and valuation.

Secondly, data are needed to assess the financial impacts. The more BES data are available, the easier it will be to uncover the financial impact of BES factors. More transparency on the level of financial impact will in turn contribute to the willingness of organisations to invest in the collection of BES data. This will result in more BES data being available, which in turn will result in increased transparency as regards financial impact.

The availability of BES data alone is not enough. The information needs to be understood and interpreted by investment professionals. The financial impact transparency level therefore depends on (i) the expertise of investment professionals and (ii) the availability of adequate tools to use the BES information. However, there will only be such capacity if organisations allow their professionals to be trained in this field. The more transparent the financial impact of BES factors is, the more interest there will be in BES, and subsequently increased willingness to invest in capacity and tools.

The willingness to invest in the development of expertise and tools also depends on the general orientation of the asset managers and asset owners concerning the relationship between business and sustainability. A profit-driven, short-term business case orientation will generally lead to scepticism towards the relevance of ESG aspects (with less interest in BES specifically), and this will decrease the willingness to invest in capacity and tools. A more integral orientation towards ESG by asset managers (and asset owners), in which a sustainable future for society and business success are seen as two sides of the same coin, will lead to a stronger interest in BES. A similar effect can be expected with regard to the willingness to invest in the collection of data.

The internal organisation of asset management firms has two characteristics that hinder the development of expertise on the part of professionals to understand the BES aspects of investments: (i) generalisation is required for career promotion, i.e. specialised knowledge is easily forfeited, and (ii) the performance criteria for asset managers are based on short-term benchmarks, which discourage them from shifting towards a more long-term perspective and taking risks with 'unfamiliar' criteria. Judging these professionals on performance criteria with a stronger orientation towards long-term profits and ESG factors would increase the willingness to invest in capacity development.

Last but not least, if only a few asset owners include BES criteria in their strategic investment plans, few BES-integrated investments are likely to be made. In turn, this will lead to a lack of willingness by asset managers to invest in building up expertise. However, if more asset owners would include BES criteria in their valuation models, the more asset managers would be interested in developing those capacities.

Some experts argue that if pension holders were to have more influence on the investment criteria of pension funds, they would urge pension funds to integrate ESG criteria (and BES criteria) in their strategic investment plans. This argumentation assumes that a substantial group of pension holders would prioritise sustainable investment, thereby willing to accept the risk of receiving a smaller pension (which they can enjoy in a more sustainable world), and hoping for higher pensions based on the view that taking ESG issues into account evidences sound investment strategy leading to higher returns. However, various pension fund managers argue that a voluntary application of ESG considerations on investment-selection would reduce their investment universe, which might result in higher risks.

It becomes clear from the diagram that addressing one of the impediments could solve part of the market-failure, but could easily lead to another barrier. More interventions are needed to change the entire system. The diagram shows that two main routes towards the integration of BES into investment decision-making could be taken: (i) by demonstrating the financial impact or materiality of BES (left part of the diagram); and (ii) by stimulating a more integral orientation towards ESG and by directly stimulating demand through institutional investors (right part). This could be reinforced if pension holders place demands pertaining to integrating BES criteria in investment decision-making. Although for many people the loss of biodiversity as such should arguably be sufficient to tap into an intrinsic motivation of all actors, proof of materiality and an investment case would be needed for the mainstream investment community to integrate the information into decision-making. However, an exclusive focus on the latter route might not enable an adequate and material shift from niche to mainstream. A combination of the two perspectives would probably lead to the best results.