Changing the behaviour of companies to help solve ecological and social problems – rather than contributing to them – might sound like trying to tame a crocodile. For the global organisations representing investors who are nevertheless attempting this, getting reliable data is their biggest hurdle.
Jon Wright is the sustainable finance reporting manager for international banker HSBC, which has issued US$4 billion worth of green and Sustainable Development Goal (SDG) bonds over the past three years.
This sounds like a lot of money but Wright recently told the Ethical Corporation’s Responsible Business Summit Europe that it was just the start. HSBC plans to invest US$100 billion (A$163 billion) in sustainability by 2025. The bank has already spent US$12.5 billion (A$20.38 billion) of this total, helping clients to issue green bonds.
“Our biggest impact is in our client base, helping them to transition themselves to a low carbon economy,” said Wright, who was among a group of interesting speakers at the summit.
“We have our own green loan principles and guidelines. The work is exciting, there’s a long way to go, and a major challenge is looking at the amount and quality of the data available, getting clients to change their behaviour and change our own banking practice to recognise this.”
For example, HSBC is helping Walmart green its supply chain.
Proving the case
Freddie Woolfe, head of responsible investment and stewardship for Merian Global Investors, is obsessed with finding what he calls “proof points” for whether a company is worth investing in from a sustainability angle.
He said his firm has already done a lot of work internally on greening procurement. “We want to practice what we preach to gain credibility. Our greatest impact is through the investments we make,” he said.
“Our three drivers are: our clients, who are interested in financial performance and impacts; regulation – there are 450 policy instruments in the top 50 economies and clients want to do the right thing before they have to; and good business sense.”
“Proof points” enable him to identify the best performing listed companies to invest in.
Woolfe says putting a value on intangible assets not included on a company’s balance – such as social and natural capital – can help identify proof points.
Mandatory or voluntary?
Ruth Knox, a managing associate for the sustainability team at law firm Linklaters, is concerned with a different aspect. She wants to know whether mandatory or voluntary frameworks are better at bringing about positive change.
In practice, mandatory requirements from government are limited mainly to controlling greenhouse gas emissions.
“But voluntary frameworks for ESG (environmental and social governance) reporting have taken the world by storm,” she said. “We are at a moment of transition, with some strong leaders.”
She said that in Europe the EU’s sustainable finance package is helping the cause. “It is prioritising climate change at the moment, but criteria for investing in social capital will follow,” she said.
Roadmaps for companies
Richard Hardyment, research director for the World Benchmarking Alliance, has perhaps the hardest job of all. He is responsible for coordinating and overseeing the development of the WBA’s benchmarks.
He said high-quality, targeted benchmarks drive innovation, shed light on best practice and accelerate progress on the SDGs. His methodologies to gather rigorous data can provide companies with roadmaps to implement the SDGs.
“The private sector has many great projects but I challenge people that progress is too incremental,” he said. “Companies need to ask what does it all add up to? Does it step up to the challenge?”
For him, the word “impact” means something specific but it’s not usually what companies report. “It’s not a statement of inputs or outputs but the measurement of the long-term change resulting from these activities.”
In other words, it’s no good noting how many lightbulbs you’ve changed, you need to calculate how much electricity has been saved as a result, and them compare it to the amount that can potentially be saved and that needs to be saved.
“This is easier in some topics than others,” he said. “We need to think about moving to these types of disclosures. Benchmarking shines a light on the leaders and laggards. They should point ahead. Our job is to raise the bar [on reporting] so we can achieve the SDGs and the Paris Agreement.”
Woolfe identified a further problem with reporting connected to green bond impact assurances – company confidentiality. “We are able to disclose with a renewable energy investment how much money has been invested but we have to rely on what a company will disclose.”
This hinders independent scrutiny and confidence.
He gave the example of an investment in a wind farm where he could not publish where the windfarm was or how much power it would be generating.
He lamented also that “there is no standard on the whole impact of an investment, which includes our share and other costs too. We need to look across the piece”.
“A lot of companies aren’t disclosing, so we are educating our frontline staff to encourage clients to voluntarily disclose.
“Small sole traders don’t understand this, or don’t have the capacity, but leading corporations do. They know they have to do this and have the capacity. There’s a lot of work to do, though.”
The reliability of data
Wright agreed that “It’s no secret that there are big problems with the reliability of data in company reports. Is a given reported result deliberate – due to the company’s policy and action – or due instead to outside factors or greenwashing?
“Take health and safety in mining: suppose a company reports a year with no deaths. What caused this improvement? Numbers alone don’t tell you why or how they’re achieved – they need a narrative to contextualise them.
“Investors also need to understand value opportunities and how they evolve over time. Such information is not available from historical data. So we need companies to give a compelling strategic narrative or business case when reporting.”
Knox agreed, saying she had reviewed many company reports and found that they do not often give the full picture. “We need caution in reading these.”
She thinks the EU’s sustainable finance package will be a great help. “It requires disclosure and reference to the technical taxonomy (not fully implemented yet). In this context it is best to under-promise and over-deliver through the data on company websites.”
Context is key
“Context is key to interpreting reporting results,” said Hardyment. “If you say you’ve improved the lives of so many smallholders, you need to say how that fits in with the overall number of smallholders in your supply chain and with the target you’ve set.”
He said to make companies change there had to be a balance between the carrot and the stick. “Divestment doesn’t change a company – someone else will invest instead.”
Woolfe went further, saying: “The status quo won’t get us to where we want to be. Some companies’ business activities won’t be viable any more, and investors may say they need to be run down. We need to have these conversations.”
All participants agreed that we’re at a crossroads, and that there was a lot of work to be done.
David Thorpe is the author of the books The ‘One Planet’ Life and the new ‘One Planet’ Cities. From October he is teaching an online Post-Graduate Certificate in “One Planet” Governance.