The Science of Finding and Measuring Impact

    Stockholm (NordSIP) – As she just got off the red-eye plane journey from New York to Stockholm, Dr. Dinah A. Koehler, Executive Director, Sustainable Equities at UBS Asset Management told us with great enthusiasm about why she joined her team and how she is achieving her long-term goals. Most importantly, she gave us an intriguing insight into how her team is trying to integrate impact into a listed equity strategy. Several asset managers have expressed the same ambitions, but none has described a procedure driven by quite such an inquisitive mindset.

    Having started her career in the industry and followed by further education in sustainability, Koehler is neither a typical investment manager, nor the usual sustainability guru. She has an efficient approach, mostly driven by a genuine passion for data and evidence-based research. After graduating with a BA in International Relations from Wellesley College in Massachusetts in 1991, Koehler ventured all the way to Hungary and became Environmental Manager at Tetra Pak. “I remember being faced with boycotts and criticism, as the Hungarians considered Tetra Pak, a manufacturer of disposable packaging, as the symbol of our wasteful western approach to consumerism. It was my job to dispel that perception and explain the environmental merits of Tetra Pak’s products . I came to the company’s headquarters in Sweden to learn about sustainable forestry, and how Stora transformed itself from a mining company into an integrated forestry products company. It was an eye-opening experience to see the multifaceted reality of what was then called ‘environmental management’ and what we call ‘corporate sustainability’ today.”

    After a couple of years, Koehler went back to the US and got a Master degree in Law & Diplomacy from the Fletcher School at Tufts University, and soon after a Science Doctorate at the Harvard University School of Public Health. “After my experience at Tetra Pak,” Koehler says, “I became interested in the question of environmental and societal effects of business. But I felt that I didn’t know enough. The intricacies and interdependencies of the issues were extremely complex and this was not being fully captured in corporate environmental management and measurement. At that time being an environmental manager was about compliance, and you needed to be a lawyer or an environmental engineer.  I was neither. After attending the third UNEP FI meeting in New York, I realized that financial markets could be a powerful force for sustainability, potentially more so than regulators and NGOs.”

    For Koehler it was crucial to put numbers on the issues first. “How do I figure out what environmental risk is?” she asks. “The Harvard School of Public Health was the place where I could find answers. How do you define environmental risk and how might this impact financial risk? What happens when Humans are exposed to the environment? These questions were real to me. I needed to understand the biological consequences of environmental exposure.” In 2003, Koehler defended her dissertation on “Capital Markets and Environmental Health: Social and Financial Valuation of Toxic Chemical Releases.” After that, she stayed in academia as a post-doctoral researcher at Wharton and further developed these ideas in different positions at the US Environmental Protection Agency (EPA) and Deloitte, among others. But she had to wait until early 2015 for the perfect opportunity when Bruno Bertocci, Head of the Sustainable Equities Team at UBS asked her to join his team.

    Now she is working in her element. “Materiality is at the core of our investment approach,” she explains. “That means that we limit our  analysis to the factors that we believe are likely to be material. Our team decided to create a proprietary ESG database and score, as opposed to relying on external data providers. We believe in quality over quantity, so we focus on a handful of metrics for each industry sector. We rely partially on the SASB materiality maps, which help us identify the key factors that matter for each sector. For example, environmental factors will weigh more in materials or industrials, whereas for service sectors such as IT or healthcare, human resources weigh more. Governance is equally important across all sectors.”

    Based on her previous experience at the EPA and her studies at the Harvard School of Public Health, Koehler’s role is to focus on quantifiable risks to human health and the environment, what we call ‘impact’ in sustainable finance. “We have a balanced mix of competences in our team, and we complement each other. For example, one of our team members has a quant background, and we work together to identify relevant data sources that provide us insight into these risks. Discussions of materiality are rather vague, so we must dig deeper.”

    “At the EPA, we funded researchers from business schools to tell us about corporate environmental behaviour and how this could define corporate sustainability,” Koehler admits. “We were hoping for insight into how this could be measured. But never really got there.” Meanwhile, in the financial sector and asset management, in particular, there have been many efforts to assess corporate sustainability,  but not linked to changes in the real world. That is where Koehler’s unique set of skills can help. “Environmental scientists may not have the whole answer, but they can help, and we haven’t been asking them enough. They can provide the necessary scientific insight to help us measure impact for example. If you approach the science of corporate sustainability as a multi-disciplinary endeavour, you will see many pockets of expertise.”

    Concretely, the idea of impact measurement has no limits when applying a scientific mindset. “What is the investment doing for the future?” asks Koehler. She starts with the usual examples. “Does the company produce renewable energy? Does it increase efficiency? These are easily measurable, but it can go much further. By how much are emissions of greenhouse gases or air pollution reduced? How many people benefit from reduced air pollution and live longer healthier lives, and where? We know that across the globe an estimated 3.3 million people die prematurely per year just because of air pollution. A wide range of technologies, from batteries in electric cars to teleconferencing equipment, trains, energy meters and insulation all make our lives more energy efficient. These are examples of impactful technologies produced by publicly listed companies which have a real world positive impact on society and the environment.”

    At UBS for the Global Sustainable Impact Equity Portfolio, the team selects the investment candidates for the portfolio based on technology, ESG scores and valuation. “There are specific technologies we have identified that we believe will generate the type of impact we are looking for. While the actual impact is not yet a standalone criterion, we integrate the idea through the selection of the technology. We then consider the ESG performance metrics and valuation of each stock. We also report on impact once we have invested. A large part of my role is education and to help clarify how our investments are sustainable. I also research new areas where we can expand our impact measurement framework, such as poverty alleviation.  One hypothesis is that banks can help alleviate poverty, typically in emerging markets. I have started talking to poverty experts, who are active in areas such as microfinance for example. However, another compelling theory of change is making birth control more available. Investing in impact requires systems thinking and a willingness to think outside of the box.   After three years at UBS I am convinced that finance can play a critical role in creating positive impact.”

    Picture © NordSIP

    Aline Reichenberg Gustafsson, CFA
    Aline Reichenberg Gustafsson, CFA
    Aline Reichenberg Gustafsson, CFA is Editor-in-Chief for NordSIP and Managing Director for Big Green Tree Media. She has 18 years of experience in the asset management industry in Stockholm, London and Geneva, including as a long/short equity hedge fund portfolio manager, and buy-side analyst, but also as CFO and COO in several asset management firms. Aline holds an MBA from Harvard Business School and a License in Economic Sciences from the University of Geneva.

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