Over recent years, the importance of sustainability, environmental, social and governance (ESG) issues and the impact that companies have on the environment, individuals, and local and global communities has risen up the corporate agenda.
This is the first briefing in a series of briefings which will look at the role that technology plays across the ESG landscapes, both in terms of addressing underlying environmental and social issues themselves, as well as in measuring and monitoring the social and environmental impacts that companies and investors make.
Increased scrutiny and investment
Cases such as Vedanta Resources Plc demonstrate the level of scrutiny now placed on international companies for the ESG effects of their local operations (and the potential to account for local failures in foreign courts).
Countries and companies are investing to achieve the UN’s sustainable development goals, and governments and regulatory bodies are placing increasing emphasis on the role of companies in a global society – for example, through measures to try to reduce modern slavery in supply chains (to illustrate the point, one need only turn to the UK’s Modern Slavery Act 2015 or the growing body of European regulation to improve the environmental sustainability of financial investments).
Against this backdrop, sustainable finance initiatives have grown in popularity, and many investment vehicles are looking to:
- Integrate sustainability into their decision-making and investment activities.
- Invest in and support projects and businesses that implement these objectives.
Initiatives such as the IFC Performance Standards and the Equator Principles, to encourage and monitor compliance with sustainability targets, are becoming more widely adopted by both financial institutions and investment funds alike, and form an increasing feature of their risk management framework.
Additionally, there has been a rise in interest from private individuals in specialised “sustainability”, “impact” or “ESG” investment vehicles, whether from boutique impact funds and sustainable banks (such as Triodos Bank) or from more traditional investment banks offering impact and sustainability vehicles (such as UBS). According to Bloomberg, the value of global socially responsible investments grew by 34 per cent to US$30.7 trillion over the two years to April 1, 2019, with Europe being the largest region for sustainable investment at US$14 trillion.
What is the role of technology?
Increasingly a range of disruptive technologies is:
- Being used across business sectors to disrupt traditional business models and incumbents and to create entirely new solutions, including in the areas of impact and sustainability
- Shaping the way that companies and investors do business and measure impact
In examining the role that technology plays across the impact and ESG landscapes (both in terms of addressing underlying environmental and social issues themselves, as well as measuring and monitoring the social and environmental impacts that companies and investors make), this series of briefings will consider a number of different use cases:
Blockchain and the supply chain
Regulations such as the UK’s Modern Slavery Act impose ever increasing obligations on companies to take responsibility for the impact of their supply chains on the wider community. We will look at the role that modern technologies, particularly blockchain and other distributed ledgers and automated databases, have in creating transparent and accountable supply chains that allow companies, regulators, and consumers to assess and audit the effect that such supply chains have on the environment and communities.
DeBeer’s Tracr is an end-to-end diamond industry blockchain traceability platform. It will provide a first-of-its-kind digital register for diamonds to ensure authenticity, traceability and accountability across the diamond value chain. The platform is intended to be an industry-wide, open source solution delivering value to all ecosystem participants, including producers, manufacturers, traders, retailers, brands, financiers and consumers.
Internet of things and sustainable development
According to the World Economic Forum, the internet of things will play a significant role in ensuring satisfaction of the UN Sustainable Development Goals. We will examine how the internet of things helps to create an ecosystem of sensors, appliances, and devices that interact with the internet and each other in order to continuously collect, track, and monitor data, and how this can then be used to assist in the monitoring of compliance with sustainability targets.
Illuminium Greenhouses, a Kenyan Agri-Tech business, works with smallholder farmers to use greenhouse and irrigation technologies for sustainable agriculture. Illuminium Greenhouses uses micro solar-powered sensors to measure various parameters – such as water moisture, nutrients, humidity and temperature – which feed into a system that can automatically adjust irrigation flows, fans and ventilation, as well as giving alerts to the farmer.
Impact measurement and monitoring
Traditional monitoring and evaluation methodologies often do not accurately capture social performance data. Similarly, the criteria against which “impact” or “sustainable” investments are judged may differ from, and be more subjective than, those traditionally deployed for financial investments. We will consider how companies are using technological solutions such as the internet of things to help measure and monitor compliance with sustainability targets and to create objectivity in evaluating sustainable investments.
Acumen’s Lean Data project allows for the collection of reputable and high quality data in respect of impact metrics by using mobile technology and standardised survey tools to collect data from stakeholders that can effectively be benchmarked.
Data collection and screening technologies
Even where impact metrics can be successfully collected, it is often hard to compare the impact of different companies, investments or funds. As consumers turn to “sustainable” or “ESG” vehicles to invest their money, they need to be able to track both their financial return as well as their “impact” return. We will look at how technology can be used in benchmarking and providing effective screening tools for the sustainable investor.
Sustainalytics provides data services that enable investors to integrate environmental and social research into third party systems (such as Bloomberg), allowing the creation of databases, reports, and dashboards to facilitate investment analysis and decision-making. Dashboards can display ESG data alongside financial data, as well as comparisons against previous financial years (to demonstrate changes in ESG impact over time) and against peers (to directly compare companies’ ESG performance).
The use of new technologies is not without challenges, whether from concerns about whether the digital world accurately reflects what is happening on the ground, to concerns about cybersecurity and whether the current global regulatory and legal framework adequately addresses the inherent risks.
Despite such concerns, improved data collection, transparency, and auditability through the use of emerging and increasingly disruptive technologies should help companies to meet:
- Some of the challenges of increased scrutiny (whether from regulators, government, stakeholders, investors, or broader society) in relation to the role they play in sustainability and the impact they have on the wider community.
- The practical demands of more stringent regulatory and risk management frameworks.
- Increased pressure to deliver cost savings.
This series of briefings will explore these various themes in the context of an operating environment in which the demands of stakeholders and regulators become more ubiquitous, perhaps driving further technological innovation with a view to addressing some of the greatest challenges that modern society and the global environment have ever faced.