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According to Steve Lydenberg, founder and CEO of TIIP and author of the paper explaining the guidelines, being able to identify which issues were significant enough to be integrated into investment processes “is crucial for institutional investors because issues with too narrow a focus may prove irrelevant, ineffective, or even potentially detrimental to their management of long-term risks and rewards”.
He argued that considerations about environmental sustainability or “the creation of a just and prosperous society” encompassed many issues, but “not all of these can – or should – rise to the level of ‘relevant consideration’” by institutional investors.
To determine which issues were worthy of their attention, institutional investors should consider four criteria, Lyndenberg suggested: consensus, relevance, effectiveness, and uncertainty.
Issues that shared these characteristics were “those that will be of sufficient concern that long-term investors can reliably treat them as credible”.
He said an issue could be worth considering if it had achieved a broad consensus as to its legitimacy and general importance, whether positive or negative.
To pass the “relevance” test, an issue should have “substantial potential to impact positively or negatively the long-term financial performance of not simply one portfolio or asset class, but portfolios across most investors and asset classes”, according to Lydenberg.
The “effectiveness” criterion would be met if institutional investors had the ability to influence the functioning of a given system.
Lastly, an issue could be deemed reasonable for consideration “if it involves difficult-to-assess uncertainties in the event of systems-level disruption”.