ESG investing, which stresses environmental, social and corporate governance yardsticks when building a portfolio, has long struggled with a lack of transparency and differing metrics across companies — making it difficult for investors to gauge the impact of their investments.
Now, San Francisco-based asset manager Newday Impact Investing believes that using what it calls an Ecological Benefits Framework (EBF), or "a shared market architecture," could provide a new way forward in social investing. Newday, which focuses on environmentally- and socially-responsible portfolios, argues that EBF gives a more comprehensive overview of the true effect a business than does traditional ESG investing.
EBF was created by Douglas Gayeton, co-founder of The Lexicon, a non-governmental organization that tries to address environmental challenges created by the agrifood industry. EBF takes into account six elements, air, water, biodiversity, healthy soils, equity and carbon, and builds a holistic model that investors can use to weigh the social aspect evaluate impacts.
Newday Impact adopted EBF in October, making it the first institution to use the "shared market architecture" in its investment process, and applying the framework across portfolios devoted to the oceans and blue carbon (or carbon captured by the world's ocean and coastal ecosystems).
"One of the challenges has been that there are a whole bunch of different [ESG] frameworks. But they're all super complicated oftentimes even from organization [to] organization, as impact interpretations are very, very different," said Doug Heske, CEO of Newday Impact. Meanwhile, EBF "is seeking to provide a framework for an integrated ecological standard."
Applying the framework
For now, the EBF framework doesn't create a cumulative "score," says Heske.
"I think in this ESG environment, there's been a detriment to furnishing what is an alpha or an alpha-numeric score because people make assumptions about that score," said Heske. The drawback is that an all-encompassing score fails to capture the nuances, and different impacts, of a project across various geographies, according to Heske.
Healthcare company McKesson, for example, is one of Newday's portfolio holdings after EBF metrics were applied to evaluate the business. Using that criteria, here's how the drug and medical supply provider came out:
- Carbon: McKesson has set several science-based targets (SBTi), including: Reduce Scope 1 and 2 greenhouse gas (GHG) emissions by 50% by 2032 from a 2020 base year. By 2027, the goal is to have 70% of McKesson suppliers (measured by spending), have their own SBTi-approved GHG emissions reduction targets.
- Equity: Newday identified that 36% board members are women, and 36% people of color. Women chair three of the five Board committees. In 2022, the McKesson Foundation awarded a $500k grant to Parkland Health to support the new RedBird Health Center which has a high number of patients from underserved communities.
- Healthy soils: In 2023, invoice reduction for more than 13,500 customer accounts resulted in savings of $20.5 million annually, eliminating 116 tons of paper and 112 tons of carbon dioxide (CO2) emissions, and saving 2,784 trees.
- Biodiversity: The pharmaceutical division's pilot project for paperless invoicing saved more than 51,000 sheets of paper per day, and yearly emissions of 64.7 tons of CO2.
- Water: The Leadership in Energy and Environmental Design (LEED) and the WELL Building Standards Areas are considered at McKesson offices and distribution centers
- Air: The company is focusing on sustainable packaging and waste reduction across offices, warehouses and distribution centers. The effort is estimated to eliminate nearly 60 million cardboard boxes annually, equivalent to 400,000 trees. In 2021, they diverted 79% of company-wide waste, and 49% or 131,400 tons of retail food waste from landfills, avoiding an estimated 825,427 metric tons of CO2e emissions in the air.
Examining investments through the EBF prism also expands carbon markets, through a more diversified view of the impact of projects, according to Heske. Carbon markets allow companies to trade carbon credits to help offset their greenhouse gas emissions, using counterparties from other companies that rare curbing emissions. Bear in mind, however, that carbon offset markets have come under scrutiny for "over-crediting" projects and for insufficient offset schemes.
A common 'library'
Heske says the goal of the EBF is to build a measurement, reporting and verification (MRV) library that investors can access in their environmental decision making.
"Ultimately, a few years down the road ... somebody can go in and find the part that's most directly correlated to the work that they're doing, and find an example of that," Heske said.
The EBF takes a pre-existing multi-step MRV process, which measures greenhouse gas emissions as a basis to issue carbon credits, and provides a more comprehensive look beyond carbon, Newsday's Heske believes.
Lexicon plans to launch an "EBF Commons" in 2024, which it calls "a digital handshake for the planet that empowers a common language across carbon markets, [corporate social responsibility] and ESG reporting," analyzing investments and government agencies. The firms within the commons will become a collective decision-making body to navigate regulations and increase interoperability across carbon marketplaces.
Over time, Newday plans to also apply the EBF to its private equity projects. Heske and Gayeton have also been looking at incorporating blockchain and machine learning into the EBF investment construction methodology, which could help draw conclusions from databases at an increased scale. Heske is also considering collecting data on client behavior that could build a "values alignment profile" through broader demographic categories.
Eventually, EBF could lead the way for markets-based solutions, Heske thinks, and helps explains impact to clients "in a way [so] that it doesn't feel like a homework assignment."
"It already is a very, very powerful tool to get people more engaged in understanding the power of their capital, into companies, into projects, into private companies and even associated with their charitable donations into nonprofit organizations," Heske said.