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5.1. General prerequisites for effective capital allocation The following prerequisites for effective capital allocation focus on enabling investors and other financial market participants to effectively allocate capital toward sustainable economic activities. These prerequisites are second-best options that primarily focus on the financial system. They assume that first-best solutions – eliminating market failures in the economy – are still not (fully) realizable.
5.1.1. Impact: Measuring the right thing in the right way For effective capital allocation, investors need to know the impact of their portfolios on the environment and society. Relevant, reliable and, thus, comparable impact assessments need to fulfil the following requirements: ▪ Assessing external effects: Some positive or negative impacts are fully or largely internalised into market prices, such as remuneration of labour in a functioning labour market. Due to market failures, however, other impacts are not sufficiently internalised, such as the global warming effect of GHG emissions. As a consequence, market participants such as companies, consumers or financial actors do not adequately take them into account. Relevant impact assessments, therefore, need to measure these external resp. “extra-financial” effects that occur due to market failures. ▪ Encompassing entire value chains: Complete impact assessments require the consideration of entire value chains. This is because relevant impacts often arise along the value chain outside a company. For example, main impacts in the food sector usually arise in the supply chain, or in the transport and housing sector during product use. ▪ Benefits as reference values: Assessing a company impact is more than just assessing physical carbon or water footprints, hazardous waste ratios, gender pay gaps or number of accidents at work. A company’s impact is positive if it contributes to reducing market failures, or negative if it contributes to maintaining or even increasing market failures in an overall systemic perspective. This is evaluated by using the societal benefits of companies’ products and services as reference values for evaluating physical environmental or social footprints. The main question to be asked is: Can a certain societal need, e.g. for housing, nutrition, transportation, energy, etc. be fulfilled with better physical footprints? Renewable energy, for instance, uses scarce resources and causes emissions. However, as it allows substituting fossil or nuclear energy, the overall systemic impact is positive. Energy-efficient machines and devices contribute to saving energy and, thus, have an even more positive impact in terms of climate change or resource usage. This kind of impact assessment – with benefits provided as reference values – is necessary to evaluate companies’ impacts in terms of
INFRAS | 3 May 2021 | Summary
