The Question Is: What Makes an Investment Sustainable?
As investors become increasingly interested in sustainability, a number of fintech companies have leapt to the challenge, and are helping investors channel their money into sustainable companies. This generates another challenge: How do we measure the sustainability of a company?
When you walk into MakeImpact’s office in Copenhagen, you’re met by all 17 of the UN’s Sustainable Development Goals, framed and hanging on the wall. Admittedly, some of the colourful images have fallen down, but the Global Goals still serve as a daily reminder of MakeImpact’s purpose.
An investment community, targeted at young people who are interested in sustainability, MakeImpact’s videos, podcasts and articles dotted with emojis, GIFs and memes serve as an informal A – Z of the investment world.
As for where the 17 Global Goals come in, one of the services MakeImpact offers is to match their users with companies who have publicly stated that they support certain goals. However, MakeImpact’s CEO and co-founder, Varan Pathmanathan, is very conscious about not telling users specifically which companies they should or shouldn’t invest in.
We’re not experts in the sense that we’re going to tell users what is or isn’t sustainable. They’ll have to figure that out for themselves. What we provide is education and an overview so that they can start making decisions about their investments,
Varan Pathmanathan, CEO and co-founder of MakeImpact.
And there’s a reason the company uses the UN’s goals in particular to determine which companies might interest young investors: Most people are able to relate to goals like eradicating hunger, putting an end to climate change and improving gender equality.
“For a long time, investing has not been accessible to the general public. What we’re trying to do is create a language that regular people can understand. The Global Goals work as a good guideline for us and young investors—they serve as prompts for learning about value-based investment,” says Pathmanathan.
However, such a noble intention isn’t without challenges. Pathmanathan is aware that companies can play SDG Bingo, as he calls it, and go public with statements about how they support all the 17 Sustainable Development Goals, regardless of whether their actions reflect this or not.
The UN estimates that between 4,000 – 6,000 billion euros are needed to achieve the 17 World Goals. Public funds and philanthropic organisations aren’t going to be enough. If the goals are to be met, it will also require capital from the private and institutional sectors, and this is where the financial sector can really make a difference.
There are plenty of studies indicating that interest in investing sustainably is increasing and it’s easy to think ok, problem solved. Unfortunately, this is not the case.
Investors—professionals and beginners alike—now face the challenge of figuring out just how sustainable a “green” business really is, and how to even begin to measure that in the first place?
Niels Fibæk, CEO and co-founder of Matter, sums up the challenge as follows: As an investor, there are a large number of frameworks, guidelines and best practices regarding sustainability that you must consider before you can assess whether a company is sustainable.
One solution is to buy data from different data providers, but this generally leads to even more confusion. Data providers’ ratings don’t necessarily evaluate whether a company lives up to local sustainability standards and it’s sometimes hard to see how the rating was reached in the first place. What’s more, different data providers can rate the same company very differently.
“We’re working with an imperfect database. That said, more and more data is becoming available from credible sources like NGOs, civil society and international organisations, and that helps us a lot,” says Fibæk.
Matter provides investors with data about the sustainability of many of the publicly listed companies, so the more data available, the easier it will be for them to assess how sustainable a company is.
The big picture
Hemonto is one of the fintech companies making use of Matter’s data. But Hemonto isn’t in the business of asset management; it’s more like a financial watchdog keeping an eye on customers’ investments to ensure that they are being managed properly and in accordance with the customer’s wishes.
In total, Hemonto monitors 300 billion DKK that has been invested via various banks and asset managers. Their customers include municipalities, trade unions and NGOs.
Several years ago, we began to look into how the various asset managers perform in terms of returns, costs and risks, in order to help our customers make the best choices. Then we wanted to be able to offer even more knowledge, so we started to look into how they perform on sustainability,
Ken Gamskjær, CEO and Partner at Hemonto.
In 2019, Hermonto and Matter began collaborating. In practice, this means that Hemonto – across asset managers and types of asset – collects the names of the companies a customer has invested in. The list is then submitted to Matter, who prepares a report. If an NGO has flagged a particular company because they trade in weapons, Hemonto will find out about it.
It is also possible to compare an investment’s carbon footprint to a specific benchmark, or compare two asset managers on their carbon footprint.
“Our overview of the database combined with Matter’s sustainability metrics means we’re able to give a customer an overall impression of their entire investment portfolio, which they are then able to act on if they see fit,” says Gamskjær.
Green data is a game-changer
Although “green data” is relatively new, it has already become a game-changer for companies like Hemonto who have eagerly incorporated it into their business.
“It’s always been our aim to create more transparency when it comes to investments, and that’s not just about cost and return. The fact that we can now inform our customers about their investments’ sustainability is very motivating for us. We’re ahead of the game and we can use that to push a green agenda,” says Gamskjær.
Because there is still a long way to go when it comes to meeting the UN’s 17 Global Goals, it’s necessary to train professional investors in sustainability, according to Matter’s Niels Fibæk.
What we’re seeing now is that all kinds of investors are learning and gaining expertise, and a lot of that is about mindset,” he says, and continues, “In recent years there has been a big shift in how we see our investment portfolios. In part it’s about the risk—we want to make sure that, when the next Volkswagen case hits the fan, we don’t have shares in the company. But a lot of people have also begun to think about how their investments are influencing the world.
Niels Fibæk, CEO and co-founder of Matter.
There is, in any case, a lot to indicate that green data will play a crucial role in making sure that capital meets sustainable objectives, in a way that does not necessarily have to cost investors money to do so.