ESG impacts - do we trust in data?
Impact of carbon offset plans
On the journey to become carbon neutral, companies often start the reduction of their carbon footprint by offsetting GHG emissions through social and environmental projects or buying carbon credits. Offsetting is a good first option but should not be a long-term target to any company. Emissions offsetting is literally paying yourself out from having released GHG emissions to the atmosphere. The trap of offsetting is real. A more sustainable solution is that companies increase their energy efficiency and develop their business practices to be more sustainable and at the same time reduce offsetting. However, if your company is offsetting emissions, you should carefully check the objective of the project and visit the site (e.g. the specific forest) for making sure it actually exists.
Offsetting is not a risk free solution and relying on one-sided data and verification of the baseline emissions and quantifying a project’s actual emissions can lead to overestimation. This is what happened in California’s cap and trade program in April 2021. In an research executed by CarbonPlan, a total of 29% of the forest carbon offsets that were analyzed overestimated the amount of carbon emissions they were offsetting. 30M tonnes, worth about $410M was the amount of overestimated carbon emissions (1). Carbon offsetting is a less simple path to take and imagine how far reaching impact a data/verification mismatch like this is actually having on ESG investing decisions and on the company’s real ESG impact.
Make a difference between ESG and impact investing
ESG investing consists of an assessment of company’s practices from environmental, social and governance perspectives, using publicly available information of the company, that investors use to better measure their portfolio companies environmental and social impacts. Today, 12.5% of assets under management in Europe are scrutinized under ESG criteria. This number is estimated to go up to 57% by 2025. In 2020, the ESG funds captured $51.1billion from investors in United States making it a fifth consecutive annual record (2, 3).
ESG investing is often confronted with impact investing. Although these does not mean the same thing. Impact investing is a term that investors use when they look at investing in a company or organization that’s business model creates positive environmental or social impact to the world. Basically any company that is changing their strategy to be more sustainable can fall under the ESG criteria but only businesses, nonprofits and funds in industries that address social and/or environmental issues can be part of impact investing.
What makes ESG data reliable?
Similar with these two investing principles is that both creates sustainability data of the companies by looking at them from outside. In addition, companies produce data on their ESG impacts and their sustainability actions. In order to prove the impact of sustainability policy companies need to do concrete things and communicate the results of their actions. In our recent blog post we highlighted this fact we firmly believe in: Who do you trust more than yourself?
According to a survey by HIP Investor, approximately 30% of the ESG data that investors are interested in, is not currently being disclosed by companies (4). There are two options why. Either the data is available but company has decided not to share it with third parties or the data is not available, it haven’t yet been measured and thus it is not shared. How can we get quality ESG data from companies if there is this gap in between sustainability data verification companies and the disclosing companies? (5)
Companies would disclose data in a more transparent way if we as a society would have trust in the process. No trust means less data openly disclosed. Consequently, the third party ESG assessment has its challenges as the data businesses are disclosing does not fully meet interest of the investors.
How companies use their data, whether it concerns the sustainability actions or customers personal data, it must be treated sustainably. We all know what happens to companies who doesn’t take their data security and privacy policies seriously and act against the protocol (sharing without permission) (6). The same applies to ESG data that companies collect when they measure their sustainability actions, or when a third party assessment company creates an understanding of portfolio companies’ ESG impacts, it needs to be managed responsibly with presenting a data source every and each time.
Blockchain business models for data sharing
Sharing data is becoming more and more important when it comes to creating ESG standards, as discussed by Bruno Le Maire in European Commission conference on the Corporate Sustainability Reporting Directive (CSRD) in May 2021 (7). He highlighted the importance of good reporting, good data both in the need for standardization and data accessibility. Europe should take a lead in this and become a rule maker. (7) Standardization requires collaboration between businesses and other parties and transparent data sharing to start forming industry based KPIs that would make comparisons possible and help investors in the ESG assessments. We need blockchain business models where industry based data is shared within a fully secured digital environment that everyone can access.
Communicate ESG impacts transparently
When a company becomes aware of its Environmental, Social and Governance impacts, defines its sustainability actions and starts to show the performance, it can actually be on top of their sustainability plan. Data as such is an enabler but when its sustainably managed, it is a means to form clear and transparent sustainability communication that benefits all stakeholders, owners, employees, clients, suppliers and investors.
(1) Reuters, 30 April 2021, California Program overestimates climate benefits forest offsets study, https://www.reuters.com/business/environment/california-program-overestimates-climate-benefits-forest-offsets-study-2021-04-30/
(2) CNBC, 11 Feb 2021, Money invested in ESG funds more than doubles in a year. https://www.cnbc.com/2021/02/11/sustainable-investment-funds-more-than-doubled-in-2020-.html#:~:text=Money%20invested%20in%20ESG%20funds%20more%20than%20doubles%20in%20a%20year&text=ESG%20funds%20captured%20%2451.1%20billion,environmental%2C%20social%20and%20governance%20principles.
(3) MSCI, available at: https://www.msci.com/our-solutions/esg-investing/what-is-esg
(4) HIP Investor, The Global Handbook of Impact Investing: HIP investor ratings materiality metrics of US companies. https://hipinvestor.com/global-handbook/
(5) Greenbiz, 28 April 2021, BlackRock’s former head of sustainable investing says ESG and sustainability investing are distractions. https://www.greenbiz.com/article/blackrocks-former-head-sustainable-investing-says-esg-and-sustainability-investing-are
(6) Digia, 19 April 2021, "Yksi suurimpia kilpailuetuja tulevaisuudessa", vastuullisuuden uusi alue, data avaa valtavia bisnesmahdollisuuksia. https://blog.digia.com/vastuullisuuden-uusi-alue-data-avaa-valtavia-bisnesmahdollisuuksia#adcf930a
(7) European Commission conference on Corporate Sustainability Reporting Directive (CSRD) Review, May 2021. https://ec.europa.eu/info/events/finance-210506-non-financial-reporting-directive_en#:~:text=The%20European%20Commission%20is%20reviewing,easy%20to%20access%20and%20use