Aligning ESG Measurements to Outcomes Has Been Notoriously Hard, Until Now

Can Sustainable Finance help protect natural ecosystems and preserve Bio-diversity?

In a previous life it seems, I travelled to Borneo with my wife. Thirty years ago, we were alone with a guide as we drifted along in a boat watching Proboscis monkeys shelter from the rain under leaves, like old men caught in the open and hiding under newspapers. We saw orangutans in the wild and helped turtle conservation as eggs were protected and released from the local rat invasion. Most striking though were the stories of deforestation and the quantity of primary rainforest destroyed to extract one Teak tree.

Fast forward to the present day and we have all seen the effects of clear cutting in Borneo to plant palm trees and other monocrops. Many have seen the striking image of an orangutan desperately battling against a logger’s machinery, which personified the plight of nature for me more than any number of cuddly panda shots.

Most right-minded people are aware of the tragedy of bio-diversity loss, yet wonder how to balance the needs of local people to make a good living, companies to make a profit, governments to be able to care, protect and develop and sustain the natural world.

One area that has huge momentum and potential to resolve this conundrum is Sustainable Finance. 

Simply put, imagine a world where we could go back thirty years and no decision would have been taken to affect that Borneo rainforest unless it passed a test. A test which benefited People (Local), Profit and Planet. 

If all business cases and investment decisions had considered what that world would look like in thirty years and all factors such as local health, wealth and education; the natural ecosystem; water; air; global GHG impact and more had gone into the risk calculation, would those rainforests have been cut down?

Most pragmatic sceptics would throw up their hands and say 'probably!' Probably because it is an imperfect world, where greed and corruption seem so prevalent. But frankly the short term demands of feeding a growing population often drives decisions that in hindsight seem so wrong.

So, let us reimagine the way we test before we invest and try to fix it by adding the ability to predict future scenarios and manage to the agreed outcomes. One of the key acronyms in Sustainable Finance is ESG (Environmental, Social and Governance). These three pillars help define the test and the measurements but aligning to outcomes has been notoriously hard. 

Outcome measurement has been equivalent to flying a plane at 30,000 feet over that rainforest once a year and taking a picture with a mobile phone. Maybe worse we have asked the owner of the logging company to take the picture and send the investors their interpretation of the results.

But we are at the confluence of change and that should offer hope more than at any other time. The combination of citizens and consumers demanding sustainability; governments legislating for mitigation and adaptation to climate change; corporates repurposing in the face of this demand and the financial services industry being driven to price in the risk of these threats to their balance sheets. This has unleashed a wave of technology that can at last provide the check and balance to ensure the desired outcomes are delivered.

One example, if you are in any doubt, is Ocean Mind. OceanMind began in 2014 with “Project Eyes on the Seas”, a collaboration between the Satellite Applications Catapult and The Pew Charitable Trusts. Initially a collaboration to develop technology fusing satellite data and artificial intelligence to detect illegal, unreported and unregulated (IUU) fishing, it soon developed into a suite of services to help governments and the seafood supply chains to understand the compliance of fishing activities. See this case study with Sainsburys to learn how it works.

Now we have the model, we know how to track and trace, we know how to create and value a circular economy, we know how to feed this data to the risk systems of investors and we know how to measure compliance outcomes and returns. Indeed, a Task Force on Nature-related Financial Disclosures building on the lessons of the Task Force for Climate related Finance Disclosures was launched in July.  

As recently reported in the FT, we are on the cusp of making more devastating short-term decisions in Indonesia. The plan on this occasion is to dump nickel mining tailings into pristine seas renowned for unique coral reefs and turtles. While the need for electric vehicle batteries is creating the drive for nickel, this time we must use high quality Sustainable Finance stewardship to ensure the mining does not even start until they have a guarantee of sustainable mining practice and the investment manager has “state of the art” monitoring in place to hold the investee supply chain to account. 

If we had been able to apply these practices and technologies at scale in 1990, I feel sure I could have revisited that trip to Borneo with my children and shown them the wonders I saw, while noting the improvements to the lives of the local people.