ESG is an acronym that is on its way to becoming ubiquitous in business circles. ESG, or Environmental, Social and Corporate Governance, is a set of values that is becoming a benchmark for companies across industries and around the world. Companies are applying ESG standards as part of a drive toward sustainability, responsibility, and good corporate citizenship.
Today, take a look at almost any company’s strategic roadmap or KPIs for a CEO and these values will be reflected. As ESG-minded business practices gain more traction, investment firms are also increasingly tracking their performance. Financial services giants like JPMorgan Chase, Wells Fargo, and Goldman Sachs highlight their ESG approaches to business and the impact on their bottom-lines.
Environmental criteria relate to how a company performs as a steward of nature. Social criteria examine how a firm manages relationships with employees, suppliers, customers, and the communities in which it operates. Governance applies to a company’s leadership, executive pay, audits, internal controls, and shareholder rights. These are the three central factors in measuring the sustainability and ethical impact of a company. A variety of studies have shown that companies with better ESG ratings generate higher and less volatile earnings and better stock market performance.
Sustainable finance has changed in perception from “nice to have” to “must-have.”
ESG challenges and possible solutions
Even though thinking and acting on ESG standards in a proactive way has become more urgent, challenges remain in tracking ESG factors:
- Tracking strongly depends on manual, time-consuming data collection, and there is a lack of complete transparency in the process. As a result, there are impediments to identifying areas for change
- There are no strong standardization initiatives across departments, sites, companies, or suppliers
- Tackling all key ESG metrics and implementing across a whole business is challenging
- ESG standards are hard to compare between companies in different industries; it is easier to make comparisons on past performance or relative to a competitor
- Accurate collection and analysis of ESG data without a technology approach is time-consuming and incurs high costs
Data gathering
Automating the process of gathering metrics plays an essential role in ESG compliance. There is almost no limit to the types of data a company might like to measure or track.
Take, for example, environment data, which includes renewable energy production and green attributes, forest growth/usage and waste production, water usage, gas capture, and more. The Internet of Things could offer a variety of ways to automate such metrics. For example, the open-source IoT and Machine-to-Machine (M2M) platform – DeviceHive offers significant potential for this type of automation and could be a stepping stone in implementing the business needs.
Sustainable value chains
Another point of interest is the chain of verified suppliers and counterparties. More and more companies are testing or using distributed ledger technologies (DLT), including blockchain-related tools, in the supply chain context, and in delivering verified ESG data. DLT technologies have proven their value in a variety of ways. The underlying concept — creating an immutable, real-time, distributed, and verifiable shared database of tokenized assets — is sound. DLTs offer innate benefits including rapid information, verification of authenticity, and compliance benchmarking, all of which are extremely helpful in the context of building trusted supply chains. A sustainable value chain leads to a sustainable product.
New Peer-to-Peer economic based on tokenized assets
Gathering or building trusted data ledgers is a pre-requisite for building marketplaces. Tokenizing data and creating marketplaces for selling/exchanging such tokens create a new source of finance.
There are great companies on the market for inspiration, such as Sunchain – a French company that focuses on collective energy utilization and has developed a system allowing users to track their consumption. As they state, the solution lets users ‘Optimize your collective self-consumption’. In Lithuania, WePower allows users to collect tokens for each kWh generated by renewables or even sell “future” kWh, getting a credit. Moreover, it makes P2P possible across Europe acting legally as an independent energy supplier.
Users typically control the tokenized assets through different e-wallet applications, since most of them are built on top of distributed ledgers. Consequently, chances are that such P2P marketplaces could be fully digital without any us of fiat money.
ESG is also about Big-Data
While the “why” aspect of ESG is understandable, the aspect of “how” remains in question. Despite the fact that regulations oblige companies to issue ESG reports, there are no standards for sharing data. The ability to quantify and independently assess ESG data is the basis for objective analysis. Companies, C-level executives, and investors do not have the luxury to “wait and see;” they want a real-time view and understanding of their own ESG performance. This adds to the feedback loop, which can help companies achieve their goals more quickly. This is where AI techniques could help.
Based on figures from the International Data Corporation, 90% of the data in the world has been generated over the last two years. By 2020, every second person on earth will have created 1.7MB of data. A deep analysis of this vast quantity of data could play a critical role in understanding the relationship between structured and unstructured sources of information.
For example, you could gain insight on the environmental impact of a particular factory by monitoring water or soil pollution levels, and health trends in nearby neighborhoods. Additionally, natural language processing techniques could provide answers on how environmental concepts (or any others) are correlated with media footprint and identify any gap between what is said and what is done.
Sustainable Finance
Fintech companies have been around since the ESG term was coined. Initially, ESG-based scoring models were used for investment purposes. However, today, with all of the afore-mentioned technologies being used by fintech companies, it makes sense that they are using these technologies for business model innovations and changing consumer choice and behaviors.
A great example of the synergy between ESG principles and the fintech industry is “Ant Financial Services”. In association with UNEP (UN Environment Program), Ant Financial Services has initiated the ‘Ant Forest’ in China, the world’s first large-scale pilot project to green public consumption patterns by using mobile payment platforms, big data, and social media.
The Ant Forest encourages Ant users to reduce their carbon footprint by providing individualized carbon savings data to smartphones, connecting their virtual identity and status to their earnings of ‘green energy’ for reduced carbon emissions, and providing carbon offset rewards through a physical tree planting program. Any activities (for example taking public transport) registered on the Alipay platform are counted and converted into virtual green energy, which grows a tree in the users’ account. When enough green energy is earned, the virtual tree is converted into a real tree. The associated behavioral change has resulted in over 13 million trees planted.
Fintech achievements and instruments can be leveraged to promote ESG principles, provide and support well-informed investment decisions, particularly when considering the possibilities of IoT, AI, and blockchain in infrastructure systems.