Environmental, Social and Corporate Governance (ESG)
Over the last two decades, public awareness of the environment has completely transformed how businesses operate. Consequently, society is more adept at understanding the impact human activity is having on ecological systems, there is now a general expectation for private and public organisations to constantly own and improve the impact they are having on their surrounding environments.
This expectation for action and change gave rise to environmental, social and corporate governance (ESG). This is a framework for organizations to identify, assess and ultimately enhance how they interact with society and the environment.
Despite ESG being introduced in the early 2000s, it is only recently that firms in the financial services sector have begun to engage. Consequently, they now readily mention environmental, social and corporate governance outcomes in public-facing documents, including earnings calls.
Taking steps in the right direction.
The stock market is now incorporating ESG outcomes. In April 2019, the S&P 500 ESG Index was launched, purporting to accommodate securities that meet sustainability criteria. Furthermore, leading figures from the finance community also voiced their determination to play a significant role in driving the change needed as part of COP26.
Collectively, these are positive steps in the right direction. However, bold policy claims linked to ESG are no longer being taken at face value. The financial services sector now finds itself under intense public scrutiny. Recognition of the need for action is a positive step in the right direction. Yet, the ability to take effective and measurable action is another challenge entirely.
On 31 May German police raided the offices of DWS and Deutsche Bank as part of a probe into greenwashing allegations – the first time an asset manager had been raided as part of an ESG investigation.
The challenge around ESG outcomes revolves around the expanding holistic definition it has adopted. This can include labour relations to gender equality and carbon footprints. The notion of sustainability is also changing, meaning that companies need to ensure their commitments reflect societal trends.
As such, effective solutions are needed because of the vast quantity of numerical and qualitative factors that need to be accounted for to measure ESG. And it is here where some exciting innovations are on display.
Environmental startups leading the way.
Startups are creating innovative solutions which leverage data to provide the insight needed for action.
Sust Global is one example. The London-based climate data startup is linking deep learning to climate models, and satellite and geospatial data. By integrating multiple geospatial datasets, Sust Global seeks to offer its customers, including investors and corporates, the ability to access physical climate risk and emissions and insights.
Similarly, Nossa Data is developing a revolutionary data management and analytics solution which leverages technology and artificial intelligence. Its tool ensures that companies can be on top of their ESG data management, analytics and reporting.
The fact of the matter is that high-growth scale-up companies are now developing sophisticated tools. Particularly, tools that help overcome the challenges larger corporations may face when they attempt to set, monitor and ultimately achieve ESG objectives. 7
Much like what we saw with the first wave of fintech startups, they have the potential to completely transform how ESG is approached. This will ensure that companies from all sectors, including the financial services, can act.
For now, these startups must be able to drive their innovation and gain mainstream recognition from the wider market. Undoubtedly, this will help avoid claims of greenwashing and put the private sector on course to deliver positive change for wider society and the environment.
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Companies must look at the impact their work has on the environment. Through our technology and corporate divisions, The PHA group works with clients who seek to promote their environmental concerns. Therefore, if you would like to discuss more please click here.