The concept of ‘sustainable development’ was first strongly introduced in 1987 by the Brundtland Report, Our Common Future, which defined it as development that meets the needs of the present generation without compromising the ability of future generations to meet their own needs. Although adoption of sustainability has been gradual, in recent years, it has become critical, and leaders of global businesses are increasingly embracing it.
In January 2020, BlackRock CEO Larry Fink urged global businesses to step up their efforts in tackling climate change. In May 2020, World Economic Forum Founder Klaus Schwab called for The Great Reset so as to enhance sustainable economic growth after COVID-19 pandemic. Since then, sustainability has become a prevalent topic in board rooms across the world. Despite several criticisms, it’s hard to deny that such calls from one of the world’s most powerful investors and the world’s most influential economic convener have boosted demand for environmental, social, and corporate governance (ESG) disclosures.
If You Can’t Measure It, You Can’t Manage It
The next question for businesses and investors become: what is the best way to measure and report ESG? Over the years, inter-governmental and non-governmental organizations, as well as impact investing communities and think tanks have developed various ways to measure and report different aspects of ESG. Many investors have also developed bespoke reporting standards focusing on specific environmental or social impacts.
Among the popular standards are the IRIS+ system by the Global Impact Investing Network, the United Nations (UN) Global Compact reporting tool, the Cambridge Institute for Sustainability Leadership framework, and the Future Fit Business Benchmark. The metrics used in these frameworks are most commonly based on the 17 Sustainable Development Goals (SDGs) adopted by all UN members in 2015. Another promising impact reporting methodology based on the SDGs is the UN Development Program’s SDG Impact standards for bonds, private equity and enterprises that are currently being piloted.
The plethora of impact reporting methodologies give options for investors and businesses to apply the most relevant one to their needs. However, a 2019 survey by McKinsey found that 75 percent of investors and 58 percent of corporate executives think that there should only be one sustainability reporting standard. The study showed that many investors find ESG reporting practices inconsistent, incomparable, and lack alignment with existing standards. At the same time, business executives felt that they devote too much of their resources in aligning their reports to investors’ varying standards.
The McKinsey study also revealed that investors are missing the financial materiality of ESG reports, or material connections between a company’s sustainability disclosures and its financial performance. Many standards lack correlation between a company’s ESG performance with financial performance
Investors also expressed concern about the reliability of reported ESG data, as only few undergo third-party audits. Unlike financial performance, it is difficult to verify the quality of ESG performance data. While there are tangible metrics for technical factors such as carbon emission, many ESG performance factors rely on vague and subjective indicators. This introduces an opportunity for companies to model ESG data according to their preferred narrative – a phenomenon popularly called SDG-washing.
Lack of Capacity by Small and Medium Enterprises (SMEs)
In the meanwhile, many SMEs in developing markets lack capacity and resources to carry out ESG reporting. The majority of these SMEs are either unserved or underserved by local financial institutions. Yet, when they seek funding from international impact investors, their inability to measure, record, and report their ESG performance as required by the investors further hinders access to capital. In addition to the high cost of compliance and the lack of human resources available to conduct the reporting, there is also very limited awareness and access to information about ESG standards in developing markets.
“One of the biggest challenges, especially in the SME space, is striking a balance between the cost of compliance to ESG standards and making a profit. The cost of complying to these robust reporting requirements is often too high. Another challenge is that in Africa, ESG reporting is not yet a big deal, even though it is important.”
- An investment executive in Zambia
”Impact reporting tools would be helpful for SMEs like us, we don’t have the money to hire consultants and third parties. Sometimes we do not know what investors are looking for. We do not know so much about sustainability… and ….what investors want.”
- A construction SME operating in Africa
”We’re using custom tools aligned with what investors want to see. It’d be great if there is a tool to give people flexibility to use the standards stakeholders ask for (don’t make new standards). Our SME investees usually don’t have the ability to do impact reporting – we help them in-house.”
- An investment executive in Uganda
Efforts to improve global social welfare should not exclude the people who need them the most. There is a need for solutions to bridge the gap between developing markets’ demand for capital, and financially tangible, consistent and reliable ESG reports required by investors. Therefore, as an impact-focused investment platform operating in developing markets, Investure is taking on the challenge to develop a digital solution to address this problem.
We at Investure are leveraging digital innovation in financial services, particularly blockchain technology, in bridging capital flow towards developing markets starting with Sub-Saharan Africa. On top of our existing investment platform, we are exploring ways to tokenize ESG impact, making it a tangible incentive for investors to invest in SDG-related projects. In doing this, we also hope to raise awareness and build capacity of the investees in our platform with regard to impact management.
Our dream is to pave the way towards an impact investing ecosystem enabled by impact tokens. To reach this dream, we need your help. As we are exploring potential technical solutions and business models, we hope to hear from, and potentially partner with, players across the technology, investment banking and impact investment communities. We believe that only with cooperation and collaboration can we work towards developing a reliable and inclusive impact reporting practice.
We look forward to exchanging thoughts with you! Contact us to arrange a meeting, info@investure.co .