By Georg Kell, Vice Chair, Arabesque | 10 April 2017
The dawn of the Internet was a revolution in how it restructured the landscape of the economy and society around a network structure. It became a new medium for commerce, finance, power and culture, and changed our perception of time and space. We now live in a globalized and connected world where information flows at the speed of light. In an age where data shapes almost every aspect of our lives.
At the same time, new technology and big data have disrupted entire industries and influenced how we work, how we consume, and how we view the world. Increasingly, big data also holds the promise of shifting global markets towards greater environmental stewardship, better social impact, and increased respect for universal human rights. The launch this week of S-Ray, a new tool that allows anyone to monitor the sustainability of thousands of the world’s largest companies, marks the latest development in how the availability of data can be harnessed for good.
Inspired by the impact that the X-Ray had on medicine in the early 20th century, S-Ray is the latest technology of its kind to capture vast amounts of sustainability information that now exists on companies, and make it relevant and understandable to investors and consumers. It enables a holistic view of companies over and beyond the financial bottom line, applying a values-based lens on universal principles of humanity as advocated by the United Nations Global Compact, together with a systematic assessment of environmental, social, and governance (ESG) factors that are financially material to corporations. S-Ray connects the worldwide corporate sustainability movement with investors and by doing so, elevates responsible investment into the mainstream and accelerates market transformation towards greener, cleaner and more inclusive value generation.
In our connected world, the way corporations conduct their affairs, apply technology, and develop new products and services will increasingly our future. Business has the means to build towards a low carbon world, and protect the environment through innovation. By upholding universal values of humanity, and by refraining from corrupt practices, business can also set an example that fosters greater trust and understanding between people and nations. But it can also use its global influence to advance narrow interests, irrespective of environmental or social impacts. Indeed, too many companies still hold on to the belief that polluting the atmosphere and oceans has no consequences, that labor is just a cost factor that must be squeezed, and that unethical practices are acceptable if the bottom line is met.
However, a new paradigm for doing business has gradually been spreading over the past two decades. Driven by the rise of greater transparency, new regulation, changing stakeholder expectations, and growing awareness of natural boundaries, the framework conditions for long-term financial success are shifting. Practicing social responsibility, caring for the world we all inhabit, and conducting business with sound ethics are all becoming essential components of what it means to be a good, well-performing company.
Awareness of this is not exactly new. The UN Global Compact, for example, started off with less than 50 companies at its inception in 2000, with a small group of CEOs embracing human and labor rights, environmental stewardship, and anti-corruption. Today, the Global Compact has over 9,000 corporate participants. These companies seek values-based and purpose-driven business models where public and private interests are aligned rather than in conflict with each other. Corporate sustainability has since become a truly global movement, with countless numbers of people involved both from the profit and non-profit sectors. They, Generation S, are slowly changing markets from within. It is a transformation that continually advances, although it has not yet reached the crucial tipping point.
A key reason for this is that investors have been slow in paying attention to ESG issues. How investors assess business risks and opportunities – how they interpret and seek value – greatly influences how markets evolve, where and what businesses invest in, and how corporations run their day-to-day operations. Historically, finance has been lagging behind the real economy on these issues for several years. When the term ‘ESG’ was first coined in a landmark study, ‘Who Cares Wins’ in 2004, few investors paid attention. But with the launch of the UN-backed Principles for Responsible Investment (PRI) two years later, investors started to pay attention. Today, PRI has over 1,600 members representing over $62 trillion.
Sustainable investment is undoubtedly on the rise. According to the US Social Investment Forum, ESG integration by institutional investors increased by 60% between 2012 and 2014, with around $22 trillion held today in sustainable strategies. Furthermore, a CFA survey in 2015 revealed that 75% of analysts now consider ESG information in their investment analysis.
Coinciding with this shift, corporate disclosure of sustainability information has evolved in important ways. Even twenty years ago, there were very few benchmarks or measurements for issues such as human rights, greenhouse gas emissions, or anti-corruption practices. In was only in 2002 that the Global Reporting Initiative (GRI) began to develop such indicators. Almost a decade later in 2011, around 20 percent of S&P 500 companies used GRI indicators. Today, over 80 percent of those companies are doing so, and more than half of these reports are third-party certified.
More recently, progress has been made in bringing non-financial and financial reporting closer together through the important work of the International Integrated Reporting Council (IIRC), and the U.S. based Sustainability Accounting Standards Board (SASB). The past two years in particular have seen the rapid construction of new infrastructure for ESG data, with a dozen stock exchanges now requiring ESG disclosure and many more offering new guidance. The data architecture for sustainability information is growing all the time, despite political headwinds and current global uncertainties. According to the New York based Global Initiative for Sustainability Reporting (GISR), there are now over 120 ratings organizations offering more than 600 products. And while there are still many issues around data quality, the pipelines are open and flowing, and continuously delivering better and more accurate information.
However, despite these developments, investors are still struggling to make sense of sustainability-based approaches. A major reason is that information around ESG issues has remained scattered, incomplete, incoherent and unstructured. There has been no uniform measurement or easily applied framework that allows investors to assess corporate performance in alignment with personal values and preferences.
The next critical step is to make the vast amount of sustainability information available today accessible and understandable to investors and consumers. This is where technology-driven approaches such as S-Ray hold such great promise. Technology has long been a fundamental driver of human progress, and it can now be used to harness unprecedented amounts of corporate data. It allows us to explore beneath the surface of thousands of companies across the globe, shining a light on environmental stewardship, social impact, and ushering in an age of hyper-transparency.
The silent revolution that has been taking place across markets through the corporate sustainability movement can now accelerate beyond measure, with technological innovation allowing us to connect finance with responsible and sustainable businesses. By re-directing capital towards those companies that ultimately do more good for the world, and for society, we stand a good chance of shifting global markets towards a whole new approach. One which aligns growth and success with universal principles of humanity.