We have created a novel methodology to measure the impact of investor activity
Impact is best understood as the change than an investor affects in the companies in their portfolio that would not have otherwise occurred. Investors can often have the most impact by using the leverage their holdings in a company gives them to demand change.
When it comes to climate change, an investor’s engagement impact is a function of three quantities: how far the company moves towards Paris-alignment (PA), what share of responsibility the investor holds for that movement (SR), and the market share of the company by revenue (MS).
PA: Movement towards Paris-alignment. We focus on three kinds engagement outcomes. A company may shift its political lobbying in line with the priorities of the Paris Agreement, on a spectrum from obstructionism to active support. A company may green its business model, either through direct changes to assets (e.g., coal-plant retirements), new capital expenditure (e.g., on the expansion of renewable assets), or research and development spend (e.g., on carbon capture storage). In both of these cases, we can trace an engagement’s direct effect on a company’s real-world activities. We also look at company-wide targets. Although their real-world effects are always indirect, they represent major commitments, and often serve as pivot-points in companies’ business strategy. We measure the impact of a target by looking at their quality, at their scope, intermediate targets, and implied rate of decarbonization. It is also possible to benchmark various changes internal to a company – to governance, process and policy – against recognised standards like the UK Stewardship Code, and against the rest of the market. We do not assimilate these different outcomes (targets, business model, political lobbying) into a single commensurable scale, to weigh them against one another. We believe they are qualitatively distinct routes to the same over-arching goals of the Paris Agreement.
SR: Investor’s share of responsibility. We then establish what share a responsibility an investor can claim for a given outcome. We use three heuristics to establish an investor’s role in an outcome: direct evidence connecting their engagement to the company change, how similar the change is to the ask made of the company, and the proximity of the outcome to the engagement in time. We then identify other intervening factors, like the role of other investors, regulation or market forces, and run these same heuristics to establish a holistic picture of the case. By pulling these different factors together we can estimate the relative contribution of the engagement to the outcome. But not all cases are equally clear. We therefore establish a ‘credence score’ representing how complete our information is for each case, moderating our scores down the more uncertain we are. We are therefore fundamentally interested in how credibly responsible an investor is for a given outcome.
MS: Company’s market share. If an engagement’s impact is how far it moves a company towards Paris-alignment, we also need to moderate for the size of the company. The larger the company, the greater the avoided harm. We therefore multiply the share of responsibility a company holds for moving a company towards Paris-alignment, by the size of the company as judged by its revenue. This gives us our final ‘impact score’.
This methodology has several overlapping use-cases. We can:
Verify the impact of individual engagements or funds
Verify an institution’s impact by studying a representative sample of its engagements
Assessing the regulatory risks of impact claims and offering solutions