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Incentivising sustainability through finance

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Financial Incentives for Sustainability

Most companies today are typically measured against financial performance, and most companies who want to grow and expand need to borrow money in one form or another, to fund those expansion plans.

Whilst there are many methods to raise financing to support growth, a common way to do it is to be listed on a stock exchange. This is essentially borrowing money on the promise that you’ll use it for growth, then pay it back, from the proceeds and ideally with profit.

How investors choose which organisations to invest in, how much to invest and when to ask for their money back (e.g. sell their shares), is a very complicated matter that I don’t intend to try to explore here. However, I do want to talk about one element, Indices.

Disclaimer

Just in case it isn’t obvious, nothing I write on my blog should be considered financial advice!

Most of us have heard of the Financial Times Stock Exchange’s FTSE 100 or the Standard & Poor’s S&P 500. Indices like these are essentially groups of the “top performing companies” and as an investor they mean you can invest in a group, or portfolio of top performing companies in one go, instead of hand-selecting them yourself.

One of the principal differences between them comes down to how “top performing” is defined and how the companies are ranked against that. Each of them has its own set of criteria and standards which is agreed by the Financial Times Stock Exchange or Standard & Poor (as examples). This is well documented, and agreed to form a consensus about what “top performing” looks like.

Investor Climate Change

Overtime, as sentiment evolves, the criteria for these indices changes, in fact new indices emerge that reflect new paradigms. In the relative recent history, public sentiment has moved investors to consider excluding companies that were using unethical practices like child labour or worker exploitation, or companies delivering particular products or services, like weapons or tobacco.

One of the most notable shifts recently has been to focus on companies that are helping combat climate change. As a company looking to attract investors, you need to make yourself both financially and ethically attractive.

The United Nations SDGs provide a convenient, yet currently aspirational, framework against which to measure a company’s ethical direction, contribution and achievements. Why do I say aspirational? The problem is that whilst the SDGs are easy to digest, they are incredibly complicated and inextricably connected, and as such the tools used to help investors measure and track these in a systematic and reliable way, the indices, are yet to catch up.

Data and Measurement

sustainability technology data world economic forum wef

To keep track of the SDGs, we need a data revolution – Read more on weforum.com.

In order to be able to track how well organisations are working towards their sustainability goals, there needs to be data. However, as the World Economic Forum suggests in this article there is still much to do to get the needed data.

Start-ups and established tech companies are scrambling to provide answers. WorldWideGeneration is just one example, who using blockchain technologies to create an audit trail of contributions and activities.

With lots of different company trying to get lots of different data from a huge variety of sources across a widespread set of geographies, two of the biggest problems facing organisations trying to use this data are:

  1. There’s no unifying standard for this data, so each data source risks being in different format and of different quality
  2. The speed at which data becomes available can range from seconds to months, making sense of it all at any given point of time can be a real challenge

The upside of being able to understand and act on these data is significant, which is why there is a lot of pent up demand for accurate, holistic information and as the FT reports, a lot of asset manager interest.

This is so very important

Without being able track, measure and interpret the inconsistent sources of sustainability data, investors will likely still favour legacy established indicators such as financial performance, and will continue to define success by them. If this continues, sustainability risks never being more than a secondary consideration for companies and therefore their investors. By creating indices that allow investors to understand and focus on the SDGs, investors can choose to invest in the “top 100” companies contributing to the SDG goals, or even specific goals like the top 100 companies achieving SDG #1 No Poverty. Companies that are not delivering results in line with the SDGs can even be de-prioritised or excluded from the indices – meaning those companies are potentially going to find it harder to get the funding they need to grow.

Do you know a tech company focused on the UN SDGs?

I’m keen to speak with as many companies on the topic of sustainability as I can. If you work at one, or know someone who does, please do get in touch.

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