Removing the blindfold from sustainable investing
The fantasy of saving the planet via ecoconsumerism and other individual measures has long since given way to a clearer vision: Effecting positive change for people and the environment requires action on an enormous scale. Governments have a crucial role to play, and individuals can help by holding their politicians accountable. But to give humanity a shot at limiting global warming to 1.5 degrees Celsius, and incorporating equity into the equation, big companies will also have to step up.
That’s because the lion’s share of damage to our planet is being inflicted by corporations. Since 1983, some 71 percent of the world’s greenhouse gas emissions can be traced back to 100 companies, according to a 2017 report by the Climate Accountability Institute. Not surprisingly, energy companies are the biggest culprits, but businesses in other sectors aren’t all in the clear. For example, the top 15 U.S. food and beverage companies generate nearly 630 million metric tons of greenhouse gases every year — a volume that makes this group a bigger emitter than the entire country of Australia.
With so much sway, these companies have the power to make sweeping change — be it positive or negative. That power has become even more evident during the pandemic: It was businesses that stepped up to offer donations of PPE and produce additional ventilators, just as it was businesses who took the less heroic actions of laying off workers and refusing sick pay.
But ultimately, corporations answer to investors, and over the past decade and a half, momentum has built for an investor-driven push toward greater sustainability. ESG investing — that is, investing that takes into account a company’s environmental, social, and governance factors — has grown from a fringe idea, when the term was coined in 2005, to a powerful force in the mainstream investing world.
A recent estimate put ESG investments at more than $30 trillion worldwide, more than a third of all professionally managed assets. And the popularity of ESG seems likely to continue growing as more investors realize that it doesn’t hurt their bottom line. In fact, recent data from the International Monetary Fund shows that socially responsible investing brings in similar returns to conventional investing, and, according to CFA Institute, may even reduce volatility over the long term.
The resilience of sustainable investments has been tested by the pandemic: During the first quarter of 2020, funds with high ESG ratings outperformed both funds with low ESG ratings and the market as a whole.
Where ESG falls short
There are problems with ESG investing as it’s currently practiced. ESG investors make decisions based on companies’ climate change policies and greenhouse gas emissions goals — as well as on their treatment of employees, transparency with shareholders, diversity and inclusion, community engagement, and executive compensation, among other factors. However, investors are measuring practices, not impacts.
Spanish oil giant Repsol, for instance, is known for having very good ESG ratings even though its main business is oil extraction. Indeed, the company has put in place excellent Corporate Social Responsibility (CSR) programs and treats its employees well. It also effectively fights corruption and monitors its supply chain. The fact that an oil business ranks among the world’s top-rated companies in this regard shows that ESG data, although very useful, is not a measure of the true social and environmental impact of companies.
What’s more, most of the information ESG investors use to make decisions comes from the companies themselves. There are no agreed-upon standards for measuring ESG factors, and ESG isn’t benchmarked across industries.
ESG investing is a step in the right direction, but to truly transform the economy into one that values people and planet over win-at-all-costs profit-hunting, the metric must be actual impact rather than policies or practices. There must be a more robust and consistent way of evaluating how companies are affecting the environment and the communities that depend on it.
One intriguing new approach harnesses the power of collective wisdom to evaluate the environmental and social impact of companies. Impaakt is a collaborative platform that invites people to research and rate companies based on standardized impact analysis methodologies. It was launched in 2017 by three founders — two of them from the finance world — who were frustrated with the insider-y tendencies of sustainable investing. Their vision is that crowdsourcing information about corporations’ impacts, over the long term, gives a more accurate picture of the ways in which companies are helping or harming the world. And they say these more robust, objective, and reactive data sets are something that investors are already eager to use in order to make more socially and environmentally impactful financial decisions.
Impaakt’s model makes it easy for anyone to participate, whether by generating analysis or by rating the analysis of others. The company offers a free online training program, in webinar form, to anyone interested in writing analyses on the impact of companies, which can be shared on the platform in the form of short analyses (up to 2,000 characters). Once participants have passed the certification course, demonstrating their ability to produce robust impact analyses, each of their subsequent publications is eligible to earn a €30 reward. Members can either cash out their reward or donate it to one of Impaakt’s partner charities.
Impaakt editors validate all submitted analyses and check sources for accuracy and after an analysis is posted, anyone — whether or not they’ve participated in the training program—is free to rate the quality of the analysis as well as the impact the company had on this specific topic (e.g. how negative/positive was this impact and how small/large it was). These ratings feed into Impaakt’s algorithm that then produces a standardized impact score. So far, users have given nearly 80,000 ratings on hundreds of companies.
One recently posted analysis reports on the negative impact of Bayer-made pesticides on aquatic species. It cites academic papers demonstrating that the neonicotinoid pesticides produced by the pharmaceutical behemoth are more likely than other pesticides to enter waterways when it rains. Along with the 16 other impact analyses on Bayer — and the 615 user ratings — it contributes to a company score of -1.84 on a scale of -5 to 5.
This platform gives individuals the opportunity to learn about the corporations whose products and services they interact with each day. By writing about, reading about, and rating companies, people can go beyond companies’ mission statements and marketing in order to analyze their actual impacts. In this way, individuals are empowered to scrutinize the companies they support and share their knowledge. And the positive effects scale up from there.
As with any crowdsourcing project, the more participants, the better the results. And the stronger the transformation of our economic models. For platforms like Impaakt to make a measurable difference in the investing world, enough people will have to contribute to it for investors and institutions to trust its data. Already, it is pointing toward a new era for sustainable investing — one in which companies are truly held to account for the consequences of their activities.