Basically, while ESG investment emphasizes a solid business case for intervention, impact investment operations primarily pivot around a mission to drive affirmative shifts in a socio-ecological context. Despite their convergence in popular parlance, they fundamentally differ in approach and outlook. Further, impact capital mainly originates in First World countries and organically flows into the Global South. It offers opportunities for sustainable development due to the prevailing socio-economic realities. But ESG investments are more concerned with managing affairs in the respective enterprise backyards.
Comparing the participants in these two investment markets, ESG investing is driven by traditional finance and investment entities. Impact capital is mobilized primarily by sustainable-development-driven triggering a niche effect leading to the current asymmetry between the volume of ESG and impact investments.
Considering ESG investments are more accessible, we can safely assume that they will outgrow impact capital in the times ahead. However, that being said, impact investment will maintain its small but loyal following of true believers as the world inches closer to the SDG deadlines in 2030.
Emerging trends and opportunities in sustainability space
Fundamentally, as the aperture of the sustainability conversation widens, it provides a unique opportunity for organizations to be exceptionally ambitious. The upcoming regulations and oversights focussed on institutional conduct will inevitably have more stringent ESG disclosure criteria attached. Organizations will be expected to turn their sustainability pledges into action with measurable outcomes. This includes greener business operations that benefit not only the shareholders but communities at large, pivoting definitely towards a renewable energy future, transitioning towards circular economies that can address the persistent problem of the rising global non-degradable waste volume, and so on.
Instead of operating in isolation, climate transition strategies are likely to converge with social issues, demanding more holistic action. Further, in the post-pandemic world, assessing risk to natural capital and biodiversity will gain prominence alongside a greater focus on the social impact of supply chain operations.
While such alterations are indeed ambitious today, organizations with the right policy mindset will find the required technological means available such as evolution in renewable energy usage backed by affordable and long term storage, sustainable packaging, greener product designs and sharing consumption patterns gravitating towards greater economic circularity among others.
Regulatory concerns on climate-themed products
As climate-themed products proliferate, the need for global standards, quality benchmarks, and better governance is increasingly being felt. They are differentiated on the Paris Agreement alignment and emission intensity of the underlying assets, business operations, and strategies. Nevertheless, the terms used in describing them are highly diversified, making comparison and conclusion extremely difficult. Further, while several products are being marketed as climate compliant, a deep dive into their portfolio reveals their divergence with global climate targets.
For instance, several funds maintain considerable hydrocarbon-related exposure. Also, instead of focusing on companies that are genuinely invested in low carbon transitions, funds are often attached to organizations pursuing cosmetic shifts as a marketing rather than an operational goal.
Therefore, while the influx of climate finance is good news, it renews the onus on regulators for affirmative control and oversight to prevent greenwashing and sustain investor confidence.
How cognitive technologies can help businesses to be more ESG compliant
The cognitive tech underscoring Industry 4.0 is a lever that modern enterprises can pull on to be profitable and sustainable simultaneously. In fact, AI and associated technologies can
organizations worldwide to achieve at least 79% of the SDGs. They can build intelligent production ecosystems that intuitively optimize resource utilization facilitating circularity.
From embedded analytics to data-driven platforms for informed decision-making, the entire gamut of AI solutions can help companies simultaneously shrink socio-ecological footprint and costs of business operations. A data-driven approach combined with intuitive AI to assist human planners and system designers can orchestrate project lifecycles with an eye on the sustainability of the outcomes.
Also, digital transformation using cognitive technologies can help businesses counter uncertainties and mitigate risks, one of the core tenets of ESG compliant business practices.
Role of AI in social finance in disrupt philanthropy?
Technologies such as blockchain, AI and the internet of things (IoT), in isolation or combined can provide unique and path-breaking scalable solutions to some of the most challenging problems our world faces. So their relevance from an ESG angle is absolutely clear, not just from an implementation perspective, but also from a governance one.
In fact, the single largest benefit of blockchain it that it negates the middleman and related transfer mechanisms. This ensures funds reach the proposed recipient via transparent and traceable transactions making it imperative for social enterprise / NGOs to operate efficiently ensuring better returns on investments. From a corporate perspective, it can improve supply chain traceability, shielding businesses from the risk of conflict trades and human rights abuses.
On crypto currencies, I agree that crypto mining has a relatively large environmental footprint, and they are often lamentably linked with illegal operations. So also with blockchain. However, with the increasing usage of renewable energy in crypto mining and the newer methodologies, such debates should be put to rest.
Instead, crypto-currencies decentralized nature makes them an ideal candidate for socio-economic reforms. In fact, they can hold the key to addressing the persisting problem of steering financial inclusion worldwide, especially in developing nations like India. So while we need to ensure we do not get carried away with all the hype, NGOs, charities and philanthropists should familiarize themselves with these new technologies.
Also, issues like tax evasion and non-traceability of funds via crypto and blockchain are increasing being thwarted with the introduction of the know- your-customer (KYC) process with crypto exchanges. This is similar to what is done for other financial investments. But there is still need for a far more robust regulatory environment to monitor and protect users and recipients of such tech.
These are relatively young technologies. With blockchain for example, that brings with it application challenges like the understanding of the algorithms that power it, possibility of incorrect metrics or data creating meaningless chains and so on.
However, what is evident is that crypto currencies and blockchain are actually transformative technologies that are mostly misunderstood. They lends itself to various alternate uses beyond the crypto-domain, bringing respite for businesses looking to be ESG compliant and create tangible impact.
Role emerging tech can play in the context of non-fungible tokens
Blockchain technology also powers Non Fungible Tokens or NFTs. Mission-based NFTs can be used to issue tamper-proof, single usage promotional tools targeting specific social causes like education, healthcare, and women empowerment. They can be used extensively in cause-related efforts at a city, state, or regional level. It offers a low-cost and transparent alternative to conventional funding drives. Here donors can track contributions, and funding is unlocked only by reaching the milestones established as part of the smart contract entered into.
Sustainable bond market
It is expected that the issuance of sustainable debt instruments globally, including social, green, sustainability, and sustainability linked investments, will shoot past the $ 1.5 trillion markers within the current year. This is even while conventional bond issuance stagnates worldwide. It is driven by a heightened awareness of growing climate risk to business interests and the well-perceived need for resilience. Consequently, green bonds will likely witness record issuance, maintaining their position as the most prominent fixed-income sustainable investment classes.
As the deadline of the 2030 global sustainability agenda draws closer, we are also likely to witness a growth in social and sustainability-linked bond issuances. It will be powered by rising demand to finance new socio-environmental transition projects to meet the declared SDG targets. However, this rapid pace of diversity and innovation in the sustainable bond market will inevitably make it much more complex and possibly more opaque than ever before. Therefore, ensuring credibility across the landscape will be vital to sustain the trust of the investors looking for greater socio-ecological accountability of their capital.
(The writer is a leading ESG Expert. She writes on Sustainability Practices, Tech, Policy, Responsible Finance & Social Impact)