ESG investing now mainstream, but who's holding 'greenwashed' portfolios to account?

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Environmental, social and governance (ESG) concerns are rising up the agenda of investors, who are increasingly more attentive to the impact of their investments.

Beyond financial performance, investors are looking at their portfolios in relation to ESG factors, but how can they assess the ESG credentials of companies and funds when the data is scattered and not as accessible as cold, hard financial statements.

Enter, Net Purpose. It’s a data startup trying to solve this problem by centralising hard data. Itsplatform aggregates numerous sources – from public companies, international agencies, scientific literature, and impact estimates where the data doesn’t exist – for investors to consult and use when making decisions.

City A.M. spoke to Samantha Duncan, Net Purpose co-founder and CEO, to discuss how impact measuring could drive sustainable investment decisions.

Why is access to data on ESG factors important to inform investment decisions?

We serve investment managers that are managing money on behalf of their clients, whether that be pension funds, high net worth individuals, insurance companies. On the financial side today, they’re supported by a $30bn financial data industry that only exists to provide them with financial facts like revenue and net profit. So they can just access that and make decisions and not have to aggregate that data themselves.

We are now in a world where all investors will need to measure the social and environmental performance of their portfolios. We collate all the information we can possibly find on every social and environmental fact, as it relates to the companies that these investors invest in. They access that data via subscription. And they use that to report to their clients on the performance of their portfolios, and also make different investment decisions so they can create climate strategies or create gender equity strategies or create whatever strategy they want that pursues a social or environmental goal.

In the past, what were the barriers to this type of impact reporting?

I think it’s been difficult to know what to measure, the data hasn’t really existed and the task of getting what did exist was huge. We’re just getting the momentum behind needing to solve this challenge.

Now we’re kind of in a place where standards are coming together so that you do have reasonable commonality across key metrics. So we can start to aggregate all of this quantitative data and put it in one place.

Until recently, companies didn’t always report their social and environmental performance. They often reported the policies they had in place, at the board level, but not actual metric tons of carbon emissions, cubic meters of water used metric tons of waste. And now 90 per cent of the world’s largest companies are doing that.

The challenge now is that this data exists in thousands of different places. It’s highly unstructured. So actually, the process of getting the data out of these filings is quite involved. And we have the expertise to know what we’re looking for and have a huge analyst team, we’ve got 50 people on our team, as well as engineers that are automating this task, but that task in itself is not insignificant.

Why is there now an increased need for transparency to hold investors accountable and prevent greenwashing?

The urgency of this situation grows every day. And I don’t expect that to be the last report that comes out and sounds the alarm but yes it is a very significant one. The momentum behind measuring the climate performance of every single investment or portfolio that you run,is urgent. It’s urgent for people that care about climate and investors that are managing sustainable strategies. And it’s urgent for people that don’t manage sustainable strategies because regulation is coming into place across Europe.

The European Sustainable Finance Disclosure Regulations will require that all investors report on their principal adverse impacts or tell others why they’re not doing that. Climate and carbon emissions are front and centre. It is going to be in place next year. Everyone will need to report on these key indicators for climate.

What are some of the challenges you are currently facing?

Financial markets went through a process of bedding down financial accounting like 20 years ago. Before financial statements were different in every country. It wasn’t until the WorldCom and Enron collapse that we merged and created an international financial reporting standard and GAAP, the two standards that everyone reports on. The challenge, I think, for social and environmental performance is that we’re still in the 80s and 90s of that transition. You’ve got all these different standards that are converging, but we need to get them to converge as quickly as possible. So we can all agree on what the key indicators are.

Getting companies to report and those facts to be audited is the second challenge. At the moment, there’s no truth set. Apple or Facebook or Amazon can disclose their metric tons of carbon emission that have been done using internationally accepted calculation methods. But no one can go and verify that like they actually emitted what they reported.

I think our challenge and our opportunity is to just pull together as much data as we physically can from all different sources – what the companies say and what the companies don’t say – so that investors get the truth set as quickly as possible by validating and using multiple different data sources, like satellite data and imagery, for example, to complement financial and non-financial disclosures by companies.

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