Does your investment portfolio have “the quan”?

In the film Jerry Maguire (1996), a romantic comedy and sports drama, there is this wonderful scene where Rod Tidwell explains to Jerry Maguire, what he means by “the quan”.

Maguire:             Quan, that’s your word?

Tidwell:               Yeah man, that’s my word. Some dudes will have the coin, but they will never have the quan.

Maguire:             But, what’s the quan?

Tidwell:             It means love, respect, community, and the dollars too. The entire package: the quan!

Quan is exactly what we need to rebuild our economy. Post pandemic, a new economy will need investment in financial inclusion, sustainable agriculture and food chains, renewable energy and much more. But it’s not just about the money. We need to mobilise resources urgently in a more equal and sustainable way. In other words, we need the entire package: love, respect and community, the quan.

But will talking about love, respect and community with big commercial banks get us very far? Maybe, maybe not. So I´ll use a phrase which is perhaps more familiar to the investing world and that is: sustainable development finance.

Sustainable development finance

Generally this refers to the process of taking account of environmental, social and governance (ESG) considerations and the UN Sustainable Development Goals (SDGs) when making investment decisions. And the good news is that sustainable development finance is growing fast. There are many examples of what is happening, such as:

United Nations-convened Net-Zero Asset Owner Allianceis a group of 29 international institutional investors, representing nearly US$ 5 trillion assets under management, that have made a commitment to transition their investment portfolios to net-zero greenhouse gas emissions by 2050.

Global Alliance for Banking on Values(of which Oikocredit is a member) is a network of banks, credit unions, MFIs and community development banks from around the world committed to advancing positive change in the banking sector, making it more transparent, supporting economic, social and environmental sustainability.

Sustainable Financeis an initiative of the World Wide Fund for Nature in which WWF collaborates with banks, investors, regulators and stock exchanges to integrate ESG into mainstream finance and to create a resilient financial system that supports the global development agenda.

Global Investors for Sustainable Development (GISD) Allianceisa UN-convened group of global investors aimed at leveraging the insights of private sector leaders to remove impediments and implement solutions for mobilising resources for sustainable development.

But regrettably the concept of sustainable development finance is still too vague, and we have a long way to go. According to GISD, there is a lack of global alignment, consistency and conformity. The supply of capital is there, but inconsistent approaches to metrics and the failure to come together around common classifications creates a wall between capital and the world’s sustainability needs.

To add to this lack of clarity, there is greenwashing; marketing that portrays an organisation as producing positive environmental outcomes when this is not the case. There is also rainbow washing; marketing that portrays an organisation as contributing to the (colour coded) SDGs, when this is not the case.

Measuring your quan level

In an attempt to better align the sustainable development finance world, a more transparent framework was developed by GISD. This framework is a useful one, and I use it here to establish what I call a quan scale. Here quan levels go from the lowest level-0, being “the coin”, to the highest level-5 being “the quan”, i.e. “the whole package”.

Quan level-0: traditional investing. Maximising financial returns regardless of environmental, social and governance (ESG) factors.

Quan level-1: negative screening. Excluding activities or industries with defined negative impacts, e.g. arms, extraction of fossil fuels or governance practices such as a lack of transparency or deliberate overcharging of clients.

Quan level-2: ESG integration and engagement. Integrating positive ESG factors into investment decisions and possibly enhancing financial returns. This is not only about environmental issues like climate change, but also social issues like a company’s labour practices and governance matters such as board diversity. The investor also engages with its investees to improve their ESG performance.

Quan level-3: positive or best in class screening. Selecting and investing only in best performing companies across industries in terms of sustainability performance and ESG.

Quan level-4: SDG themed investing. Investing in one or more themes or assets constructed around the SDGs, for example water and sanitation, clean energy and sustainable cities. Here it is important that the contribution to the theme is clear cut, unambiguous and clearly focused on the spirit of the SDGs.

Quan level-5: impact investing. Investing with the intention to generate positive, measurable social environmental impact alongside a financial return. This level can only be claimed by those that measure the impact. That may sound easy, but can be extremely difficult and costly.

Do you have the quan?

The most widely applied sustainable investment strategy globally, used for two-thirds of sustainable investments, is negative screening (quan level-1). But ESG integration (quan level-2) has been growing at 17% per year.

The quan levels 3 to 5 are still mostly reached by social impact funds and development finance institutions (like Oikocredit) but even some of them are struggling to get to level 3 as they lack a clear framework. There is still a huge gap to achieve the SDGs in developing countries, estimated to be US$ 2.5 to 3 trillion per year. We need to work on higher standards to push the financial industry to more sustainable levels and with more money being invested. And we need the whole financial industry to get involved.

So, my question to financial institutions, regulators, stock exchanges and investors is: which strategy will you go for? The strategy only of “the coin”, or the strategy of “the quan”?