In fact, technology is not just critical, technology is the answer.
It can support ESG investment decisions with accurate reporting, drive sustainable IT, provide carbon neutral technologies, and give investors opportunities to create a path to net zero with fully transparent outcomes.
Companies who don’t embrace ESG reporting technologies risk losing the fundamental trust of their investors.
The European Banking Authority (EBA) recently published binding standards on Pillar 3 disclosures on ESG risks. These will enable stakeholders to assess the climate change, social and governance risks that impact an organisation’s balance sheet.
In November 2021, during COP26, a new International Sustainability Standards Board (ISSB) was announced. It will create sustainability disclosure standards to guide investment decisions and consolidate existing policies to create a gold standard
Reinhard Dotzlaw, Partner and Global IFRS Leader at KMPG says:
“The creation of globally consistent and transparent sustainability disclosure standards focused on long-term value creation will strengthen our capital markets by helping investors make better decisions. The hope now is that jurisdictions globally get behind the new ISSB.”
Climate tech is part of a larger movement that, driven by the rise of ESG, will be accompanied by reporting technologies which enforce robust regulation and support long-term interest. ESG is now centre stage and businesses, investors and governments are using it to link their decisions to measurable outcomes,
What ESG also shows is that technology is part of a broader movement that enables social and environmental change. So, how can technology support a broader movement towards regulation and standards?
- Accurate Reporting Reduces Investment Risk
Most companies know they need better data to monitor the outcomes of their ESG initiatives. But existing data is undermined by a lack of regulation and 82% of investors believe that companies will not comply with ESG reporting regulations.
That’s where technology comes in. When companies can measure their environmental and social impact, they can show that their plan is working and boost credibility with investors.
Unsurprisingly, technology companies are stepping into the gap in a big way.
ServiceNow has developed a new integrated ESG solution to help companies comply with existing and proposed regulations. Google Cloud has launched Carbon Footprint with a transparent calculation methodology for verification against industry standards.
Stephen Everard, Chief Executive Officer at Goal Group, a global fintech specialist in withholding tax reclamation and securities class action recovery services, says:
“Fund managers and institutional investors have a duty to maximise their investment returns including efficient and cost-effective reclamation of overseas income from foreign tax authorities which until recently was an expensive and uncertain process. In an environment where ESG is central to investment credibility, technology and software solutions can only be viable where they enhance returns whilst also being fully ESG compliant.”
Taking ESG data seriously means leveraging the latest developments in Artificial Intelligence, Natural Language Processing and Blockchain. Companies can leverage Artificial Intelligence and Natural Language Processing to automatically create real-time reports. Investment managers can then analyse how policies are impacting their ESG rating from the outset, making it easier to optimise the outcomes.
But technology can also provide unexpected insights.
A recent study by MarketPsych, a company that uses Natural Language Processing to analyse sentiment data from news and social media, linked stock price performance to workplace sentiment:
“Month-after-month, companies with happier employees outperform their peers and companies with unhappy employees underperform. Such data can also be used for risk management — to avoid companies performing poorly on ESG metrics.”
The recognition that new technologies can transform the ESG landscape is not new. In 2018, a World Economic Forum report argued that blockchain could transform reporting by helping companies to illustrate their performance and enabling investors to make informed decisions:
“This could drive a new wave of accountability and action, as this information filters up to board-level managers and provides them with a more complete picture for managing risk and reward profiles.”
Put simply, even as ESG data is becoming more fragmented, technology can provide auditable records for insight and visibility.
- ESG Investment Opportunities & Sustainable IT Strategy
Fund managers need to evaluate how ESG funds differentiate themselves.
This means leveraging the latest developments in Artificial Intelligence to allow investors to account for environmental, social and governance risks and opportunities.
S&P Global sees this as a key shift in the issue of ESG data:
“Investment managers are coming under increasing pressure to measure ESG criteria in their portfolios. However, a lack of data is making it hard for banks to assess long-term risks and rewards. Here, AI is the answer: technologies will filter essential data that investors currently lack, acting as the catalyst for sustainable investing at scale.”
Terence Tse, Co-Founder at Nexus Frontier Tech identifies three core advantages of this technology:
- Real-time signals can provide early warnings of risk for ratings providers
- Companies can be sure that their ESG compliant activities will be captured into their ratings
- Investors will have high quality ESG data to drive their investment strategies
As this technology advances (it’s not there yet), investors will be able to use shared visibility on data to make confident investment decisions.
It follows then that a robust commitment to ESG must also include working with your Chief Technology Officer to simultaneously reduce the environment impact of IT services so as to capitalise on these advances.
Research shows that 50% of firms have an enterprise sustainability strategy, but only 18% have well defined goals and target timelines.
Capgemini identifies three critical steps to a sustainable IT strategy:
- Set the foundations with a qualitative and quantitative diagnostic assessment and an IT strategy that aligns with the organisational sustainability strategy.
- Define governance and create a dedicated sustainable IT team with support from the C-suite.
- Operationalise sustainable IT initiatives and establish sustainability as the core foundation of software architecture.
Sustainable IT strategies can also drive business goals. Kiran Bhogal, CEO of JPSB, a specialist IT consultancy providing services to the investment management community, makes a strong case for the competitive advantages of an organisational approach:
“Companies that embed sustainability into their IT strategy benefit from reduced costs and increased ESG scores. But they also achieve stronger brand value and competitive advantage because the market is increasingly driven by investor demands for sustainable businesses. They can also then potentially attract better talent. The advantages of IT sustainability massively outweigh the short- and longer-term costs.”
Linking KPI’s to enterprise sustainability goals reinforces the connection with a data driven ESG enabled technology strategy.
In fact, further research states that common sustainability practices are now a necessity rather than a strategic advantage. In order to differentiate, investment managers need to prepare to introduce sustainability measures that cannot be easily met by competitors.
- Investing in Climate Tech Companies
PWC found that climate tech accounts for 14 cents of every Venture Capital (VC) dollar. Yet some investors are still worried about another clean tech collapse.
Pitchbook analyst Svenja Telle says:
“Back then everything was focused on really R&D–heavy technologies in clean energy. This time it’s about decarbonizing the entire economy, something that is relevant for every single sector. And it’s the only way forward.”
True the sector could be vulnerable to soaring IPOs and inflated stock prices, such as the increase from $46 USD for Beyond Meat Inc. to $135. But investors must not let the risks detract from the fact that climate tech is a long-term investment tied to specific metrics.
Jonah Goldman, Managing Director at Breakthrough Energy, reminds us that climate tech investing can make a significant difference:
“If I had a wish for 2022, it would be that we take all of that effort, and we channel it through a productive set of metrics to say, ‘This activity is the most effective that we could have towards our decarbonization goals and climate goals.’ I think we’re pretty far away right now from knowing exactly where all this effort should be channeled. But that’s a great problem to have.”
And he’s right. The top five technologies-which represent over 80% of future emissions reduction potential by 2050–receive just 25% of recent climate tech investment. There is a real challenge ahead to get climate tech startups the funding that they need to support the global focus on ESG.
So, what can investment managers do to drive funding and capitalise on opportunities?
PWC’s 2021 Climate Tech report makes the following recommendations:
- Fill the funding gap: Invest in intermediaries that are targeting early-stage climate tech ventures.
- Fund early stage investing life cycles: Investors across the early stage life cycle of climate tech companies need to recognise the time-critical opportunity climate tech offers and to free up more capital to
address the large financing and funding gap. - Develop in-house technical and commercial capability: Support direct investment in climate tech deals, bring in more established startups and nurture technical and C-Suite talent for young startups.
Investment will play a key role in overcoming the barriers to net zero, but this requires collaboration, partnerships, and the right support. Then, investors can create a robust sector that delivers the results needed to mitigate climate change. New asset classes are being created opening up fresh opportunities for institutional investors and the policyholders they represent.
A Chicago-based financial technology company is pioneering an entirely new credit asset class – the Master Credit Participation Certificate or “CPC”, reshaping the traditional credit market into a more agile, resilient model with a positive ESG impact.
Joanne Marlowe CEO of UFT Commercial Finance explains how a CPC permits an investor to efficiently tap into existing but unutilized investment capacity to gain significant exposure to large scale ESG projects.
“The addition of the CPC unleashes a new-found investment capacity linked to select types of illiquid portfolio assets that would otherwise be inaccessible without an investor’s willingness to take cumbersome direct debt on their portfolio and assume the risk of separately reinvesting that leveraged capital.”
The Future of ESG and Technology
The future of ESG and technology is linked to the need for companies to demonstrate their willingness to invest in environmental and social factors.
Technology supports ESG potential by driving value-based outcomes to measure and improve impact. In fact, it could very well be one of the most important factors in generating economic value and forcing existing companies to rapidly innovate.
To do this, businesses need to establish ESG reporting technologies that remove manual and disconnected tools as well as developing sustainable IT service models. They can then create holistic views of ESG data that enables them to differentiate themselves from competitors while confidently identifying investment risks and opportunities.
The relationship between the environment and technology has to be viewed as a long-term opportunity to develop new business models and to create a symbiotic paradigm where the planet heals and investors secure positive returns based on globally standardised measures.