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Investing with Purpose: A Guide to the ABC Framework

Today’s business world is more conscious than ever of its impact on society and the environment. Organisations, whether they are corporate giants or innovative startups, are under constant scrutiny as to how their actions affect the world around them.

However, this scrutiny is not limited to judging whether a company is ‘good’ or ‘bad’, but moves into more complex territory: what kind of impact are these organisations actually seeking to make?

In a previous post and video – Keys to an impact organisation – we discussed the complex world of business impacts, which can be both positive and negative, intended and unintended.

We highlighted the importance of those organisations that deliberately strive to generate positive impacts and how they address these challenges – are they willing to minimise risks, comply with regulations, or even push their commitment to sustainability to the limit?

And now the question arises, how can investors analyse and discern the intentions and actions of organisations in terms of impact?

Throughout this post and the accompanying video, we will discuss an investment screening tool aimed at helping them align their portfolio with their purpose.

A Guide to the ABC Framework for Investors

There are companies that choose to ignore their impacts, others simply comply with existing regulations, while some strive to minimise their impacts as much as possible, seeking to achieve an optimal level of sustainability. Then there are those that consider their stakeholders and seek to maximise their positive value to society. Finally, there are those organisations that are dedicated to solving social or environmental challenges in a purposeful and positive way.

For investors, categorising these organisations is essential for managing their investment portfolio. Following the Impact Management Project model, we can speak of 3 + 2 main categories. These categories are A, B and C, and two additional ones which are D and M.

  • A: Act to Avoid Harm: These organisations do what is necessary to avoid causing significant harm to society. They tend to minimise risks and comply with existing regulations.
  • B: Benefit Stakeholders: Organisations in this category seek to benefit their stakeholders, i.e. they try to maximise the positive impacts they have on various people and entities.
  • C: Contribute to Solutions: Companies that offer solutions, products or services aimed at addressing social and environmental challenges.

On the other hand, categories D and M include:

  • D: Cause Significant Harm: These organisations have evidence of causing significant harm to society.
  • M: May Cause Harm: These are organisations for which we have no evidence of significant harm to society, but we cannot affirm that they are adequately managing those risks, which could lead to the generation of harm.

The ABC framework stems from the Impact Management Project’s investment classification guide and is a system that allows investors to align their investments with their objectives: “Act to prevent harm”, “Benefit stakeholders” and “Contribute to solutions”.

Now, the big question is: how can we apply this methodology to our investments? While its implementation is complex, we can simplify it:

First, we must list all the organisations in our portfolio and identify their most significant impacts on society, not all of them, and assign them an indicator that reflects how they are addressing that impact.

Once we have the indicators for each relevant impact, we transform that indicator into “A”, “B”, “C”, “D” or “M” according to the previous definition. That is, if that indicator shows that they are providing value to a stakeholder, it will be a “B”. Or, if that indicator reflects that they are contributing to solving a social or environmental challenge, it will be a “C”.

Once we have assigned one of the letters (A, B, C, D or M) to each of the indicators, we can classify the company according to the following criteria:

  • An organisation is A if all its indicators are A, without exception.
  • An organisation is B if at least one indicator is B and the rest are, at least, A.
  • Finally, an organisation is a C organisation if at least one indicator is C and the rest are at least A.

If an organisation has only one indicator D, it will be categorised as D, while if it has only one indicator M, it will be classified as M. Thus, we will have all the organisations categorised, which will allow us to know the percentage of each category or weighted according to investment.

This classification will serve as a roadmap, an action plan to guide our investments towards companies that contribute to a more sustainable society.

In short, the ABC framework goes beyond a simple categorisation; it is presented as a scale that gives us the ability to discern the intentions and actions of organisations in terms of their impact. There is no clear line separating risk minimisation from maximising stakeholder benefits or contributing to solutions. What is essential here is that it provides investors with a tool that allows them to transcend the labels of portfolios deemed “ethical,” “responsible,” or “sustainable,” allowing them to understand the true purpose behind their investments.

With the steady increase in flows into ESG, sustainable, and impact funds, it becomes imperative to clarify the differences between them. Assessing these funds in terms of their intentions can help us discern their genuine purpose. Understanding this purpose not only simplifies a deeper analysis of outcomes, but also highlights the importance of measuring those outcomes to assess their correlation with financial returns.

Ultimately, this information gives us the ability to align our investments with our values and aspirations, contributing to a more sustainable and responsible future for all.Today’s business world is more conscious than ever of its impact on society and the environment. Organisations, whether they are corporate giants or innovative startups, are under constant scrutiny as to how their actions affect the world around them.

However, this scrutiny is not limited to judging whether a company is ‘good’ or ‘bad’, but moves into more complex territory: what kind of impact are these organisations actually seeking to make?

In a previous post and video – Keys to an impact organisation – we discussed the complex world of business impacts, which can be both positive and negative, intended and unintended.

We highlighted the importance of those organisations that deliberately strive to generate positive impacts and how they address these challenges – are they willing to minimise risks, comply with regulations, or even push their commitment to sustainability to the limit?

And now the question arises, how can investors analyse and discern the intentions and actions of organisations in terms of impact?

Throughout this post and the accompanying video, we will discuss an investment screening tool aimed at helping them align their portfolio with their purpose.

A Guide to the ABC Framework for Investors

There are companies that choose to ignore their impacts, others simply comply with existing regulations, while some strive to minimise their impacts as much as possible, seeking to achieve an optimal level of sustainability. Then there are those that consider their stakeholders and seek to maximise their positive value to society. Finally, there are those organisations that are dedicated to solving social or environmental challenges in a purposeful and positive way.

For investors, categorising these organisations is essential for managing their investment portfolio. Following the Impact Management Project model, we can speak of 3 + 2 main categories. These categories are A, B and C, and two additional ones which are D and M.

  • A: Act to Avoid Harm: These organisations do what is necessary to avoid causing significant harm to society. They tend to minimise risks and comply with existing regulations.
  • B: Benefit Stakeholders: Organisations in this category seek to benefit their stakeholders, i.e. they try to maximise the positive impacts they have on various people and entities.
  • C: Contribute to Solutions: Companies that offer solutions, products or services aimed at addressing social and environmental challenges.

On the other hand, categories D and M include:

  • D: Cause Significant Harm: These organisations have evidence of causing significant harm to society.
  • M: May Cause Harm: These are organisations for which we have no evidence of significant harm to society, but we cannot affirm that they are adequately managing those risks, which could lead to the generation of harm.

The ABC framework stems from the Impact Management Project’s investment classification guide and is a system that allows investors to align their investments with their objectives: “Act to prevent harm”, “Benefit stakeholders” and “Contribute to solutions”.

Now, the big question is: how can we apply this methodology to our investments? While its implementation is complex, we can simplify it:

First, we must list all the organisations in our portfolio and identify their most significant impacts on society, not all of them, and assign them an indicator that reflects how they are addressing that impact.

Once we have the indicators for each relevant impact, we transform that indicator into “A”, “B”, “C”, “D” or “M” according to the previous definition. That is, if that indicator shows that they are providing value to a stakeholder, it will be a “B”. Or, if that indicator reflects that they are contributing to solving a social or environmental challenge, it will be a “C”.

Once we have assigned one of the letters (A, B, C, D or M) to each of the indicators, we can classify the company according to the following criteria:

  • An organisation is A if all its indicators are A, without exception.
  • An organisation is B if at least one indicator is B and the rest are, at least, A.
  • Finally, an organisation is a C organisation if at least one indicator is C and the rest are at least A.

If an organisation has only one indicator D, it will be categorised as D, while if it has only one indicator M, it will be classified as M. Thus, we will have all the organisations categorised, which will allow us to know the percentage of each category or weighted according to investment.

This classification will serve as a roadmap, an action plan to guide our investments towards companies that contribute to a more sustainable society.

In short, the ABC framework goes beyond a simple categorisation; it is presented as a scale that gives us the ability to discern the intentions and actions of organisations in terms of their impact. There is no clear line separating risk minimisation from maximising stakeholder benefits or contributing to solutions. What is essential here is that it provides investors with a tool that allows them to transcend the labels of portfolios deemed “ethical,” “responsible,” or “sustainable,” allowing them to understand the true purpose behind their investments.

With the steady increase in flows into ESG, sustainable, and impact funds, it becomes imperative to clarify the differences between them. Assessing these funds in terms of their intentions can help us discern their genuine purpose. Understanding this purpose not only simplifies a deeper analysis of outcomes, but also highlights the importance of measuring those outcomes to assess their correlation with financial returns.

Ultimately, this information gives us the ability to align our investments with our values and aspirations, contributing to a more sustainable and responsible future for all.