The Role of Data in Sustainable Investment

Christopher Yapp   7 June, 2022

I was very fortunate recently to be supported by C2 through a remote course in Sustainable Finance and Investment at the University of Yale’s Management School. The course is largely targeted at Investment Managers or analysts looking to better understand how the sustainability agenda could impact their returns, but it was heartening to see how many of the attendees came from the sustainability sector themselves. These included either budding data providers such as ourselves, academics, consultants or just entrepreneurs wanting to better understand the sector.

Over the course of the programme, a number of key themes were introduced and then tested via written submissions and group work. These ranged from ‘how to integrate sustainability into the pricing structure of investment assets’, ‘the differences between Green and Sustainability linked Bonds and Impact investing’, to a ‘focus on the current state of available data and the differing approaches between privately and publicly listed equities’. Whilst this all provided a solid background, there were a couple of areas which stood out as particularly relevant for the wider risk intelligence community, as well as more generally any large corporation looking to make the most of the opportunities posed by understanding sustainability bette,r as well as in mitigating the risks.

Firstly, it is evident that confusion caused by a lack of common language/taxonomy, global or even regionally accepted standards, and differing agendas relating to sustainability makes measuring it extremely difficult still. The general consensus is that demand for clear data is currently hugely outstripping its supply, an area of opportunity for those hoping to help. The challenge is that data must be comparable, and without accepted standards, that’s a real challenge. The solution is less clear, data providers have a role to play, as do governmental organisations, international bodies, and crucial stock exchanges to coordinate how those standards might apply financially, but that seems some way off.

Added to this challenge is the enormous scope of the issues covered by the sustainability umbrella. Many of these do have ready and available standards, particularly surrounding governance for example, but many more either don’t have any standards or vary region on region. For example, limits on carbon emissions may differ enormously between China and Sweden, or gender diversity targets for executive boards between Switzerland and Saudi Arabia. How then a data provider can pull this myriad of themes into a comparable, value added and easy to digest deliverable is a real challenge.

Another interesting area focus however, was the role Impact Investors must play in driving this agenda. Rather than focussing on risk and being tied to the regulations and standards (which are so elusive) they can focus on the opportunity. Fundamentally, Impact Investing is still about profit, about buying companies (or parts of them) at a discount and then using their expertise to develop and then sell them for a profit. However, this is by definition also about connecting capital to communities and opportunities and makes the target of the investment about what impact or change they can make rather than just about return. This makes Impact Investors particularly interested in identifying opportunities where companies may be lagging behind, in areas where by making easy improvements they can greatly increase revenue, and this is where sustainability comes in.

Not only is a sustainable approach the right thing to do to safeguard a future for the planet, but it can make sound financial sense as well. Using less raw materials, or making manufacturing more efficient minimises outlay, hardwiring worker’s rights or diversity into a work force can lead to better productivity, improving standards of Information Assurance avoids potential data breaches, loss of competitive advantage or costly legal proceedings. Impact Investing then provides an interesting case study to show where data providers can begin to add real value by helping identify opportunity without having to wait for global consensus and standards to catch up.

It’s clear then that there’s work to do, and the challenges surrounding creating meaningful data are plentiful, as are the dangers of that data being created to support a greenwashing or non-sincere agenda. However, there are a huge number of very passionate people working to fill that void, and just as standards and regulations across all industries, from food safety to finance, developed over time, so will those for sustainability. For now, the challenge is to make the most of what is available and try to lead the market into viewing sustainability, be it in a portfolio of investments or a supply chain, as an opportunity for profit and social capital and not just a risk to be mitigated.