A pressing issue that has become more and more apparent in every sector is environmental sustainability. More companies are turning to sustainable ways of dealing with environmental issues like climate change and deforestation, as investors are more likely to invest in a company that does not have detrimental effects on the planet. In order for businesses to survive, they must start looking away from unsustainable practices.
Nanne Tolsma, Head of Client Relations at Satelligence, has pointed out that simply getting rid of an unsustainable company is not enough to help the planet: companies must show their green initiative and how they intend to go green. He has worked for Satelligence since 2016 and started out as a business developer in Vietnam for two years. He leads the major b2b partnerships including Satelligence’s work with Asset Managers, Investment Funds and other Financial Institutions.
Here, Tolsma speaks about “The Green Revolution” of Financial Institutions:
Financial Institutions around the world are transforming into sustainable institutions. Investors recognise that they have a role to play with respect to environmental issues like climate change and deforestation, and they take action. We’ve seen a worldwide increase of green bonds and loans with more ESG integration as investors target a financial return that goes hand in hand with a positive impact on the planet. Sustainability is no longer seen as a liability but as an asset.
Financial Institutions moving forward and taking responsibility regarding sustainability is important because investors have the ability to hurt unsustainable companies where it hurts the most: their pockets. Pushing towards more sustainable practices is not achieved only through public blaming and shaming by activist NGOs: financial and governance measures are just as important.
To make investment decisions or engage with companies, it is key to have access to reliable ESG information of companies. Traditionally, Financial Institutions assess non-financial data like ESG risks in their portfolio through sustainability rating firms. Companies like Sustainalytics provide Financial Institutions with the tools and insights to assess sustainability risks in their portfolio.
However, new technology such as satellite imagery and AI allow us to go a step further by providing objective and reliable information of where and when risks actually happen in portfolios. Based on what happens on the ground, not only on what we see in headlines. In the past few years, we’ve seen an influx of new solutions that provide Financial Institutions with in-depth information on their assets.
Examples of Financial Institutions taking it a step further and making use of such new technologies are asset managers ACTIAM and Robeco. Both already integrate ESG in their decision making. They specifically focus on sustainability themes such as biodiversity and deforestation. On the one hand, they do additional due diligence for these themes to be able to better assess risks in their portfolio. On the other hand, they use those insights for active ownership purposes. ACTIAM, together with other investors, recently launched an engagement initiative using satellite data to gain more transparency in the supply chains of companies it invests in.
Besides asset managers turning to new, non-financial, sources of consistent information, Investment Funds have also started using this data. (Agriculture & Forestry) Investment Funds give out sustainability-linked Green Loans to companies that they invest in. These companies need to abide by specified sustainability requirements as part of their agreement. Investment Funds use new technology in two ways:
- In the selection process;
- During the loan period for monitoring and evaluation purposes.
Having access to all this new information is great but it also comes with challenges:
- Most solutions are based on technologies that are difficult to understand. The large number and variety of solutions that flood the market make it hard for an investor to pick the right tool;
- Financial Institutions become increasingly engaged in active ownership. This often requires in-depth knowledge of a specific field and of sustainability to be able to have informed discussions with investments.
Financial Institutions and new technology ESG service providers need to bridge these gaps to ensure better integration of ESG risk for investment decisions.
In most cases, engagement, or active ownership, is the way to go. Divesting fully from companies with bad ESG practices is unfortunately still quite common and easy to do but is that really a solution? Divesting cuts ties and thus a channel to influence the investment. Does that make our planet a better place? In reality, all it means is other Financial Institutions, likely less environment prone, will take over and the unsustainable practices will continue.
Removing an unsustainable company from your portfolio might make your books look greener, but it won’t help the planet. If Financial Institutions are to truly prioritise sustainability education must come before blacklisting. Start a conversation with your investment, show that you are taking sustainability seriously and that you are willing to learn and grow together towards a more sustainable planet.