Where ESG falls short
There are problems with ESG investing as it’s currently practiced. ESG investors make decisions based on companies’ climate change policies and greenhouse gas emissions goals — as well as on their treatment of employees, transparency with shareholders, diversity and inclusion, community engagement, and executive compensation, among other factors. However, investors are measuring practices, not impacts. Spanish oil giant Repsol, for instance, is known for having very good ESG ratings even though its main business is oil extraction. Indeed, the company has put in place excellent Corporate Social Responsibility (CSR) programs and treats its employees well. It also effectively fights corruption and monitors its supply chain. The fact that an oil business ranks among the world’s top-rated companies in this regard shows that ESG data, although very useful, is not a measure of the true social and environmental impact of companies. What’s more, most of the information ESG investors use to make decisions comes from the companies themselves. There are no agreed-upon standards for measuring ESG factors, and ESG isn’t benchmarked across industries. ESG investing is a step in the right direction, but to truly transform the economy into one that values people and planet over win-at-all-costs profit-hunting, the metric must be actual impact rather than policies or practices. There must be a more robust and consistent way of evaluating how companies are affecting the environment and the communities that depend on it.Crowdsourcing solutions
One intriguing new approach harnesses the power of collective wisdom to evaluate the environmental and social impact of companies. Impaakt is a collaborative platform that invites people to research and rate companies based on standardized impact analysis methodologies. It was launched in 2017 by three founders — two of them from the finance world — who were frustrated with the insider-y tendencies of sustainable investing. Their vision is that crowdsourcing information about corporations’ impacts, over the long term, gives a more accurate picture of the ways in which companies are helping or harming the world. And they say these more robust, objective, and reactive data sets are something that investors are already eager to use in order to make more socially and environmentally impactful financial decisions. Impaakt’s model makes it easy for anyone to participate, whether by generating analysis or by rating the analysis of others. The company offers a free online training program, in webinar form, to anyone interested in writing analyses on the impact of companies, which can be shared on the platform in the form of short analyses (up to 2,000 characters). Once participants have passed the certification course, demonstrating their ability to produce robust impact analyses, each of their subsequent publications is eligible to earn a €30 reward. Members can either cash out their reward or donate it to one of Impaakt’s partner charities. Impaakt editors validate all submitted analyses and check sources for accuracy and after an analysis is posted, anyone — whether or not they’ve participated in the training program—is free to rate the quality of the analysis as well as the impact the company had on this specific topic (e.g. how negative/positive was this impact and how small/large it was). These ratings feed into Impaakt’s algorithm that then produces a standardized impact score. So far, users have given nearly 80,000 ratings on hundreds of companies. One recently posted analysis reports on the negative impact of Bayer-made pesticides on aquatic species. It cites academic papers demonstrating that the neonicotinoid pesticides produced by the pharmaceutical behemoth are more likely than other pesticides to enter waterways when it rains. Along with the 16 other impact analyses on Bayer — and the 615 user ratings — it contributes to a company score of -1.84 on a scale of -5 to 5. This platform gives individuals the opportunity to learn about the corporations whose products and services they interact with each day. By writing about, reading about, and rating companies, people can go beyond companies’ mission statements and marketing in order to analyze their actual impacts. In this way, individuals are empowered to scrutinize the companies they support and share their knowledge. And the positive effects scale up from there. As with any crowdsourcing project, the more participants, the better the results. And the stronger the transformation of our economic models. For platforms like Impaakt to make a measurable difference in the investing world, enough people will have to contribute to it for investors and institutions to trust its data. Already, it is pointing toward a new era for sustainable investing — one in which companies are truly held to account for the consequences of their activities.This story was originally published by Grist with the headline Removing the blindfold from sustainable investing on Jun 29, 2020.