In an unequal world in which crises and challenges abound, a growing number of investors want change and would like to put their capital at work to support the transition towards a sustainable economy. It is called impact investing.
The financial industry is globally based on the analysis of financial data. Impact investing also requires reliable and comprehensive sustainability data. These make it possible to identify trends, capture new production and consumption systems while selecting profitable companies or projects.
Today, methods to assess the impact of companies are subject to significant challenges. First, data collection is still mostly based on self-reporting questionnaires, which leads to its share of subjectivity. Secondly, its manual processing ostensibly reduces the amount of data that can be managed. The result is imperfect, incomplete, and biased information.
Frameworks by the regulators
In terms of non-financial criteria, the data published by companies is expected to grow massively. Increasing regulation with detailed and granular requirements. The push has been for more accurate and robust disclosure. For instance, as part of the broader European Union Sustainable Finance Action Plan, the EU taxonomy sets a green classification that translates economic activities contributing to the EU’s specific climate and environmental objectives. This is coupled with the Corporate Sustainability Reporting Directive which requires from companies to disclose information in their non-financial statements concerning Environmental, Societal, and Governmental matters as well as their taxonomy aligned economic activities.
Similarly in the United States the SEC, the securities laws enforcement agent, recently issued a proposal “Environment, Social and Governance Disclosure for Investment Advisers and Investment Companies, which is an attempt to establish a standardized disclosure regime regarding the sustainability credentials of an investment fund.
As a reminder, financial reporting has been the product of a long evolution following lots of debates. It continues to evolve; US and European standards diverge on inventory accounting methods without negating the necessity of accurate reporting.
The impact on the world
Recent talks about the evolution of sustainability reporting have defined the concept of double materiality. It acknowledges that a company should report simultaneously on sustainability matters that are financially material for the business value (on the company) and material to the environment, and people (on the real world). This information can assist the company in developing a sustainable management strategy for issues impacting various stakeholders as well as reporting in a pertinent manner.
From the investor side, it provides information about the impact the economic activity(ies) might have in the real world. Impact measurement is seen from an output perspective. What effects do the products or services of a company have on solving environmental or social challenges. To measure the quantity or the quality of a contributing company, it all starts with a theory of change which defines the change that is expected and what type of economic activities or outputs provide a solution or are part of the problem. A selection of indicators is then defined to measure each output. A good example would be the GWh produced from renewable sources when assessing the development of clean energy or how much tons of CO2 emissions has been avoided by replacing thermal transportation with low carbon technology.
Disrupt sustainability data management
To collect, sort, clean and process these gigantic amounts of data in real time, it is necessary to equip ourselves with systems organized in the form of a database that a battery of analysts would only partially replace. This growing volume of data generated every day and the innovations associated with its analysis are revolutionizing the efficiency of investment and impact measurement. Technology plays an essential role here.
The use of this big data provides access to detailed and accurate information on the real impact of the companies and/or projects financed. For example, the positive or negative development of activities can be verified on major challenges such as deforestation or soil pollution, the generation of renewable energy or the reduction of greenhouse gas emissions.
It requires the ability to manage its sources with multiple origins and in different formats. Using reports from companies, international organizations or NGOs, satellite data or internet traffic, this data must be attributed to the companies concerned. Once these thousands of data points are organized, harmonization work and a sophisticated analysis and research process can begin.
It is imperative for an impact investment firm to be prepared to absorb this flow of metadata, and to equip itself with adequate technology to be able to perform quality research. This crucial step in the investment process is the guarantee of the achievement of the double objective, performance, and real impact.