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For ESG Success, Don’t Think Big – Think Specific

30th Jan 2023

When addressing climate change and other impact targets, how you define and measure success can make all the difference.

The acceptance of Environmental, Social, and Governance (ESG) criteria has grown rapidly in recent years, with the number of S&P 500 companies that publish sustainability reports increasing from 20% in 2011 to 90% in 2019. 91 companies from the Fortune Global 500 have publicly committed to carbon neutrality goals. When combined with government actions on climate change, it’s clear ESG is being taken seriously by stakeholders from a variety of sectors.

Unfortunately, that may not be enough. Analysis shows that particularly in the case of climate change, actions currently performed or planned won’t stem the tide of increasing temperatures. To avert catastrophe, more needs to be done.

Some say we need to adopt more sweeping regulations, increase spending on initiatives to fight climate change, and change the way we live. In short, they want us to “think bigger.” But thinking big can lead to its own set of problems that get in the way of meaningful action. Here’s why that is, and why there’s a better way.

Why “thinking big” hasn’t worked

When tackling ESG – which includes topics like climate change, gender and racial equality, and social and economic justice – where do you start? One could spend a lifetime debating the merits of certain priorities on an intellectual level and never actually get anything done, and each problem you attempt to solve uncovers more problems: is it more important to provide everyone in the world with access to energy and technology, or more important that the energy and technology employed by those who have it be green? When it comes to sustainable energy, the E and S in ESG can come into conflict with one another, and there isn’t a simple answer. Waiting for all these issues to be decided upon before acting might mean waiting forever.

One reason “thinking big” obviously isn’t the solution is because we’re already thinking big: according to research, “ESG assets are forecast to hit US $53 trillion by 2025 (a third of global assets under management).” If those numbers are even close to realized, then the problem is not that we aren’t putting enough money toward ESG. Rather, the problem is that much of this money is going toward efforts that aren’t doing any good. How do we figure out which investments and initiatives are worthwhile and which aren’t? Investors are having trouble answering this question

How greenwashing leads to apathy

A major threat to impact investing is greenwashing, investments that are ESG-focused in name only, or token initiatives meant to look attractive to investors that don’t actually accomplish anything. Bad actors can muddy the waters and make it difficult for investors to tell which impact investments are legitimate, eroding their confidence in impact investing as a whole.

In a survey of investors in the US, UK, Germany, and Australia, more than half of respondents said they felt greenwashing has increased, while more than a quarter have said it’s influencing their interest in impact investing. If investors don’t have confidence that the information they’re being told by fund managers about a project’s impact are accurate, they may give up on the notion of trying to make an impact at all.

This is where “thinking big” has its drawbacks: expecting too much from a single endeavor can lead to hopelessness and apathy if that endeavor fails to bring about the change that was hoped for, and can also lead to firms making promises that are too big in order to stand out when fundraising. That’s not good for anyone, and while there are efforts to combat greenwashing, the big problem is a lack of data. Where are investors supposed to get accurate information that can guide their thinking, and how can they evaluate that data?

Investor Update’s white paper “The Unjust Transition” sums up the difficulty in obtaining worthwhile data:

“Data quality has been a major bug-bear of all ESG stakeholders and while improvements have been made, in aggregate the problem remains the same. Conceptually, having some good data and some weak data undermines the integrity and comparability of the whole data set. Scale that inconsistency up to the global reach of financial and corporate reporting and the compounded errors severely undermine the utility of the data being collated, analysed [sic] and reported.”

Not only do investors have trouble trusting ESG reports, they may not be able to compare one company’s reports to another’s, since different methodologies and reporting standards are used for different countries, industries, investment products, and impact goals. Wouldn’t it be easier if everyone used the same data standard?

The myth of the all-encompassing data standard

It can be tempting to hope asset managers around the world will settle on a single methodology. After all, once we’re able to agree on how things are, we’ll be able to discuss how they should be and how to get there. However, it’s simply wishful thinking to believe any sort of consensus is imminent.

Can we afford to endlessly debate the merits of different methods while investors are losing faith? As articulated by Preqin’s Special Report: the Future of Alternatives 2025, “Efforts to standardize metrics and identify KPIs in ESG are still the holy grail; meanwhile, calls to make managers prove they are doing more than ticking boxes are getting louder.”

This mythical industry-wide impact data standard has been nearly impossible to find. As JTC’s Reid Thomas pointed out recently, “there are over 600 ESG frameworks, and over 250 software-based reporting systems.” There’s no agreement on what the criteria or metrics should be, and a consensus isn’t likely to come anytime soon.

In Thomas’ view, attempts to standardize everything aren’t taking into account what makes ESG investments unique:

“ESG investments don’t happen without ESG investors. Different investors have different passions and needs to be met. While this certainly includes a strong financial return, there are individual passions that they are focused on. A one-size-fits-all framework doesn’t help because fund managers need to be able to tell the unique mission of their fund to appeal to the unique passions of their investors.”

Every investment (and investor) is different, with different goals and different stakeholders to take into account. Those stakeholders may be most concerned about jobs, the environment, supporting local economies, equality in hiring practices, or simply achieving as much as possible without increasing costs or affecting returns in a counterproductive manner.

These are all very different goals that require different tactics for measurement and evaluation. It’s simply unrealistic to wait until we can come up with a single standard, a grand unified theory of ESG. Instead, you need to treat each project individually, which is why at JTC, we’re committed to measuring less, but better.

How JTC uses data to highlight progress where it’s already happening

In Thomas’ words, “You get what you measure. Before something can be measured, data needs to be collected and a reporting system needs to be adopted. But to get adoption requires a cost-effective and efficient implementation, one that won’t crush the ESG incentive under the weight of compliance and reporting.”

What the team at JTC recognized was that ESG investments have individual characteristics, and there were no solutions on the market to address these individual characteristics effectively. That’s why we developed our own technology platform, which is configurable to the specific administrative needs of specialty funds.

JTC’s ESG reporting solution is highly efficient because it’s built as an extension of our fund administration solution. Part of that solution is fund accounting, which is performed for all investment funds to provide financial statements to investors. Even though these investor reports are fundamental to all investment funds, they’re often overlooked by other reporting systems.

The same financial data that is used to generate financial reports for investors can be used to calculate many ESG performance indicators for economic, environmental, and social results. In most cases, we’re able to automate these calculations by running the data through specific tools that we integrate into our solutions. These tools help us calculate environmental results like carbon emissions, economic results like jobs created/labor income, as well as social metrics related to health and well-being.

JTC uses the data that your fund is already generating to show where impact has been made on a specific scale that takes into account your specific goals. We can’t tell you how to put the world on track toward reaching more aggressive global carbon targets, but we can tell you accurately how the capital your investors are putting into your fund is being used to reach specific targets that align with your mission. The more specific we can be with our measurement, the more accurate we can be in evaluating impact. That will give investors greater confidence and help them put their capital toward projects that do the most good.

What’s more, we can use the data we already have to calculate impact statistics that show a project’s impact status pre-investment and calculate the projected benefit upon completion. Our award-winning online investor portal is configurable to display specific items of interest to each specific fund and its investors, with impact results delivered in real-time as the investment makes progress.

Investors want to know that they’re making a difference. By working with JTC, you can set concrete goals and deliver hard proof that those goals have been met. By working together, we can tackle both small and large-scale problems not through endless debate over the grand scheme of things, but through actions that will inform and improve our decisions as we move toward a more sustainable future.

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