Asset managers’ understanding of companies’ ESG practices could be improved by using new technologies such as artificial intelligence, tokenisation, and ledger technology, according to a report from consultancy Capco.
Asset managers’ understanding of companies’ ESG practices could be improved by using new technologies such as artificial intelligence, tokenisation, and ledger technology, according to a report from consultancy Capco.
The report, ‘ESG in financial services – today and in the future’, notes that there is no common definition of what makes a ‘sustainable’ company or what constitutes good ESG practice, making it difficult for investors to assess companies.
Issues around the consistency, transparency, and reliability of ESG data are becoming more pressing as governments and supranational bodies in the UK and EU set new mandatory requirements for company reporting on sustainability.
Many ESG funds were invested in fashion retailer Boohoo until allegations of modern slavery in its UK garment factories surfaced last year, knocking GBP1.3 billion from its market value in a matter of hours. Boohoo had been rated AA by MSCI and was ranked among the top 15 per cent of its peers for supply chain labour standards in June 2020.
Capco says that new technologies could improve ESG ratings, noting the growing use of “impact tokens” on blockchain as a way of offering proof that a positive impact has been delivered and attributing it to a particular investment.
Tokens represent specific contributions toward the UN sustainable development goals (UN SDGs), such as tonnes of carbon dioxide, or a number of children attending school, which are registered on a blockchain and can then be tracked along a supply chain.
One example of tokenisation is the UN World Food Program-supported Fishcoin, which is improving the sustainability and traceability of seafood supply chains by allowing buyers to follow a fish’s journey from its origins.
Fishermen are rewarded with fishcoins for recording and sharing catch data from their phones, including name, location, fish type and weight, which are uploaded to the blockchain. These tokens are paid for by wholesalers and importers of seafood, who need the data to ensure the quality of the products.
Capco says that impact tokens may help with impact investment, if projects such as preserving rainforests in Brazil are tokenised, and are able to be traded as carbon offsets.
Capco’s report also points to the rise of ledger technology, which has been used in the diamond industry through EverLedger, and allows diamonds to be tracked from mine to customer, enabling easier compliance.
“In financial markets, ledger technology could be used to ensure trade finance and supply chains are clean of any illegal activities around enforced sanctions or embargoed countries,” notes the report.
“This technology can help eliminate misinformation, whilst also signalling to markets that companies are behaving legally and ethically, through continuous monitoring of supply chain inputs and outputs.”
However, Capco notes that for distributed ledger technology to work effectively, there needs to be scale adoption across entire industries.
Other technologies highlighted include AI-driven sentiment analysis, which measures the public perception of companies using data from sources such as social media, emails, and videos.
Better data gathering can also improve understanding a company’s ESG profile through the creation of information networks. These networks would allow investors to understand unseen drivers of ESG performance, and use big data to predict which companies are on similar path to other firms that have performed poorly.
Charles Sincock, managing principal and ESG lead at Capco, comments: “The lack of consistency in approaches to ESG is a real worry for the investment market. There needs to be far greater transparency within ESG data and around ESG scoring to enable financial institutions to be certain that they are investing in a truly sustainable cause. Greater transparency comes through better data collection and more reliable data sources.”
“Alongside increased transparency, there needs to be a supported, recognised framework which is sponsored by the industry and regulators – the International Organization for Standardization (ISO) could be a powerful force in providing more clarity to such frameworks. For financial companies, this would be valuable for all elements of the finance chain, as they would be able to see how well they are performing and also how others are performing,” says Sincock.
