ESG investing, which emphasizes environmental, social, and corporate governance criteria in portfolio construction, has long grappled with transparency issues and varying metrics across companies. This has made it challenging for investors to assess the impact of their investments accurately. However, San Francisco-based asset manager Newday Impact Investing believes it has found a potential solution. By employing an Ecological Benefits Framework (EBF), or a “shared market architecture,” Newday argues that it can offer a more comprehensive evaluation of a business’s true effect compared to traditional ESG investing approaches. Created by Douglas Gayeton, co-founder of The Lexicon, a non-governmental organization focused on addressing environmental challenges in the agrifood industry, EBF considers six elements: air, water, biodiversity, healthy soils, equity, and carbon. By incorporating these elements, investors can adopt a holistic model to assess the social aspects and evaluate impacts of businesses and projects.
ESG investing faces a significant obstacle in the form of numerous complicated frameworks that differ from one organization to another. These discrepancies in impact interpretations hinder the ability to create a standardized and universally applicable scoring mechanism. To address this issue, Newday Impact’s CEO, Doug Heske, asserts that EBF aims to establish an integrated ecological standard as a framework for social investing. One limitation of EBF, however, is that it does not provide a cumulative “score” for businesses or projects. Heske believes that attaching a single score fails to capture the nuances and diverse impacts of projects across different locations or geographies.
Amid the adoption of the EBF framework, Newday Impact evaluated its portfolio holdings and applied EBF metrics to one of them: healthcare company McKesson. The assessment revealed the following results:
Carbon:
McKesson has set science-based targets to reduce greenhouse gas (GHG) emissions. These targets include a 50% reduction in Scope 1 and 2 emissions by 2032, measured against a 2020 base year. Additionally, McKesson aims for 70% of its suppliers (measured by spending) to have their own SBTi-approved GHG emissions reduction targets by 2027.
Equity:
Newday noted that McKesson’s board comprises 36% women and 36% people of color. Furthermore, three out of the five board committees are chaired by women. In terms of community support, the McKesson Foundation awarded a $500k grant to Parkland Health in 2022 to aid the establishment of the new RedBird Health Center, which primarily serves underserved communities.
Healthy Soils:
By reducing invoice generation for customer accounts, McKesson achieved significant savings of $20.5 million annually, eliminated 116 tons of paper, and reduced 112 tons of carbon dioxide (CO2) emissions, preserving 2,784 trees.
Biodiversity:
Through a pilot project for paperless invoicing in its pharmaceutical division, McKesson saved over 51,000 sheets of paper daily, preventing yearly emissions of 64.7 tons of CO2.
Water:
Adhering to the Leadership in Energy and Environmental Design (LEED) and WELL Building Standards, McKesson incorporates eco-friendly practices in its offices and distribution centers.
Air:
McKesson focuses on implementing sustainable packaging and waste reduction strategies in its offices, warehouses, and distribution centers. This effort is expected to eliminate almost 60 million cardboard boxes annually, equivalent to saving 400,000 trees. Furthermore, the company diverted 79% of company-wide waste and prevented 131,400 tons of retail food waste from ending up in landfills, avoiding approximately 825,427 metric tons of CO2e emissions into the air in 2021.
By using the EBF framework, investors gain a more diversified view of the impact of projects, which, in turn, expands carbon markets. Carbon trading enables companies to trade carbon credits and compensate for their own greenhouse gas emissions by partnering with companies that actively reduce emissions. However, carbon offset markets have faced criticisms for over-crediting projects and implementing insufficient offset schemes. Nevertheless, Heske emphasizes that the EBF aims to provide a measurement, reporting, and verification (MRV) library that investors can access to inform their environmental decision-making processes. This resource would allow investors to find examples directly correlated to the work they are pursuing.
The EBF has the potential to transform the investment landscape further. Lexicon plans to launch an “EBF Commons” in 2024, which would serve as a digital platform facilitating analysis of investments and governmental agency regulations in relation to carbon markets, corporate social responsibility, and ESG reporting. The firms included in the EBF Commons would form a collective decision-making body to navigate regulations and promote interoperability across carbon marketplaces. Additionally, Newday intends to apply the EBF to its private equity projects in the future. Heske and Gayeton also explore incorporating blockchain and machine learning technologies to develop the EBF investment construction methodology, enabling broader data analysis at an increased scale. Furthermore, Heske contemplates collecting data on client behavior to create a “values alignment profile” based on demographic categories.
The Ecological Benefits Framework presents a promising approach for social investing. By encompassing various ecological elements and avoiding oversimplified scoring, the EBF enables investors to assess the social impact of businesses and projects more comprehensively. As it continues to evolve, the EBF may pave the way for market-based solutions and help investors realize the power of their capital in creating positive change.
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