The world around you is getting more conscious. More and more people care about environmental, social, and political issues. Both Millennials and Gen Zs are more aware of climate change, social inequalities, and governmental failures than previous generations were. Gen Zs also strive to be more ethical in their consumption. This leads to more people putting their money where their morals are.
COVID-19 pandemic has exacerbated this trend. The IBM survey showed that people are more willing to pay for a sustainable future. The attention around climate change is increasing: a recent Center analysis found that 60% of US citizens view climate change as a major threat to their well-being. While most are also unhappy about the extent of governmental measures, they are trying to take the matters into their own hands. That’s when ESG investing (ESG stands for Environmental, Social, and Governance) comes into play.
What is ESG investing?
ESG is a form of making sure your investments go to socially responsible companies. To do that, investors use ESG ― environmental, social, and governance ― criteria. Environmental factors may include a company’s energy use, waste, pollution, natural resource conservation, and treatment of animals. The way the company deals with environmental risks is also taken into account. Social criteria factors in how the company deals with employees, suppliers, and customers. For example, employees may or may not have good working conditions; companies may or may not encourage diversity, have policies against sexual misconduct, and make sure their supply chain is ethical. Governance criteria deal with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.
The demand for ESG investing skyrocketed in 2020. According to Moody’s Investors Service, the inflows into ESG products increased 140% in 2020. As much as 67% of surveyed investors now plan to buy more shares of ESG-focused companies.
This makes ESG investing a hot topic for everyone: investors, companies, brokerage firms, and mutual fund companies. The latter have recently started offering exchange traded funds (ETFs) and other financial products that follow ESG criteria.
What are ESG technologies?
ESG metrics require constant calculation, assessment, reporting, and analyzing. By now, technology has caught up with these requirements and offers a whole range of IT solutions. Some of the platforms can make the lives of companies easier, and others can tell investors where to put their money.
Here are some of such platforms categorized by their main purposes:
Calculating your carbon footprint (for companies)
Carbon360 is a cloud-based solution that helps the company calculate its emissions. All you have to do is enter the best available data that you have, and the platform takes care of the rest. It significantly reduces the time that it takes to prepare the carbon footprint report and makes it easier for companies to see how they can improve.
Carbon Analytics is another platform that helps you with carbon accounting and shows you how to improve. It integrates with your accounting software and automatically produces comprehensive footprint data that you can later use in reporting and marketing. You can share your verified carbon status with your customers, stakeholders, and suppliers, and easily present your company as an example of a low-carbon economy.
Assessing climate risk (for companies)
WWF’s Water Risk Filters
Water Risk Filter developed by the WWF is a free online tool designed to explore and assess water risk for any industry in any country. The tool evaluates water risk in relation to climate change and recommends actions that should be taken by the company. It can be used for physical assets or to address water risk in a supply chain.
Acclimatise Analytics makes tailor-made cloud-based software that provides risk, vulnerability, and adaptation analysis. They use spatial analysis that works through synthesizing big data with the latest weather, climate, and natural hazard data. The software makes it easy to measure business adaptation performance and climate risks. In addition to analytics, Acclimatise offers advisory services that may help you deal with challenges on your way to improving your ESG metrics.
Jupiter also analyses the climate risk for various industries, including insurance, banking, asset management, real estate, energy, utilities and power, oil and gas, manufacturing, chemicals, mining, retail, agriculture, the public sector, and NGOs. They use the latest predictive climate models and scenario-based approaches to provide the company with the most accurate analytics.
Standardized ESG data/scores (for investors)
RepRisk is a data science company that identifies all ESG risks. It uses machine learning and big data implementation to be more accurate and effective in identifying risks that could lead to low ESG scores. The database is updated daily, and they cover a whole range of companies.
Sesnefolio helps you quickly make sense of how the companies you chose for investment live up to the ESG criteria. The platform uses machine learning and NLP techniques to go through over 100,000 sources of information and produce standardized ESG for investors to rely on. The platform covers all US companies and most mid-to-large sized global companies.
Arabesque s-Ray is a portfolio screening tool that provides detailed reports on the companies’ ESG metrics. Its data-feed service integrates S-Ray scores within investment management, risk management, compliance, and reporting, providing investors with a full view of the company. The platform uses big data implementation tools and multiple data sources and covers over 7,000 issuers worldwide.
Within companies, there is always room for bias, misunderstanding, wrongdoing, and (sometimes, unintended) discrimination that can lead to lower ESG scores. Online technology can help with some of these challenges. For example, it might be better to use skill assessment software instead of a face-to-face interview to make an unbiased first impression of a candidate. Feedback tools, such as Officevibe, can ensure anonymous, real feedback from employees. Honest feedback about workspace and leadership in the company can drive positive and meaningful change. As sexual misconduct and harassment is a large problem for women at the workspace, Callisto, a tool for identifying repeated sex offenders in communities, can be used to catch sexual offenses at the workplace.
Is this the first step to a better future?
The line between being socially responsible and having a strong financial performance is blurring already, and there is no sign that this will change. More people want to make sure they are doing something good for the collective future, and making socially responsible investments is a logical step in this mind frame. Right now, more shareholders than ever see ESG metrics as something to rely on to make sure the companies’ risks are reduced. Nearly every company is interested in providing more and accurate data to stakeholders and investors. All of this is impossible to do without effective tools. Luckily, data science, machine learning, and predictive analytics are here to help companies become better and help investors achieve their goals of financing businesses that do good.