Net Purpose CEO Sam Duncan explains the need to bring more structure to sustainability data.
The UK impact investment market reached an estimated £58 billion in 2020 according to research published last month, which while representing a significant increase in total market share still amounts to less than 1% of the available assets under management.
A survey conducted by the Impact Investing Institute reveals growing interest. Well over a third of impact investment market participants anticipated growth rates of more than 20% year-on-year over the next five years. Applying a weighted average to the estimated future market growth rates suggests a 15% market increase which could double the funds allocated to impact to over £100 billion.
Yet for this to be realised, survey respondents say more must be done to encourage “impact-aligned sectors to shift into more intentional and accountable investment approaches”. The institute defines impact investing as investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.
This shift requires better data, but three-quarters of respondents to the survey say that access to data is a moderate or significant challenge, while 79% say that sophistication of the measurement practices is an obstacle to investment.
Data not ratings
This lack of data is what led Sam Duncan to found Net Purpose, which she describes as the “world’s first data provider for investors with a purpose”.
“We are on a mission to make impact measurement effortless for every investor in the world,” Duncan says. “We have a US$30 billion financial data industry that exists solely to collect, normalise and stream financial data to investors around the world. As a sustainable investor for the last 10 years, I’ve been on a journey to try and find the same quantitative facts that exist on social and environmental impact, and I could not find anything.”
Net Purpose’s database is aimed at asset owners, pension funds, high net worth individuals, consultants, and asset managers to give more information on a company’s impact across a broad range of ESG issues.
Duncan is keen to emphasise that Net Purpose offers data and not ratings, arguing that subjective scoring based on analysts’ opinions rather than cold hard facts are unhelpful when formulating ESG strategies.
“We need more data and fewer scores,” she says. “The proliferation of scoring and ratings have not been helpful. We should be measuring common facts that people agree are important to achieve sustainable investment goals. Ratings are subjective. They’re not based on facts, which is quite confusing in a world where we’re trying to get to standardisation.”
Net Purpose has built a database of nearly 3,000 companies (including nearly all the constituents of the S&P500 and MSCI World indexes), which Duncan says allows investors and asset managers to understand sustainability data in the same way they are able to measure financial performance.
“Measuring financial performance is simple because it is anchored in goals; everyone wants to generate top quartile performance and they can track earnings per share, internal rates of return or revenue growth. But the ESG space is still a bit confused.”
Duncan says Net Purpose brings “structure” to sustainability data by setting impact-focused goals against which a company can be measured.
“These include the UN’s Sustainable Development Goals (SDGs) and Paris Agreement which are the anchors for the Sustainable Financial Disclosure Regulation (SFDR) and other standards,” she says.
Duncan says that for the first time investors will be able to see how companies have an impact on issues across the three ESG pillars in relation to specific pieces of regulation or reporting guidance.
“If the impact you want to achieve is full, productive employment, you can the track number of jobs a company creates. If the goal is gender diversity, you can track female representation on boards. Combining goals and metrics with the ability to track performance brings structure to ESG.”
Duncan says that while Net Purpose’s data is focused on impact investing, it is available to everyone irrespective of whether they are focused on making a significant difference, or just trying to meet their ESG obligations and responsibilities under law.
Understandably, climate and related environmental impacts are critical for many impact investors. Duncan says that while data is readily available on Scope 1 and 2 greenhouse gas emissions, she concedes that there remain challenges with collecting Scope 3 – or supply chain – disclosures.
“We have a lot of data on Scope 3 emissions but there is still a way to go. Scope 1 and 2 measure the direct energy combustion of a company, while Scope 3 asks companies to measure not just what they are controlling, but what everyone else is controlling in their supply chain. It is hard for companies to do that.”
However, while acknowledging the challenges, Duncan says Net Purpose will make it easier for asset owners to align their impact investing objectives with the solutions available from asset managers.
A key recommendation in the Global Impacting Investment Network (GIIN) January report was for asset owners to “identify and use standardised impact reporting systems; and establish expectations for rigorous impact reporting to enhance alignment”.
Net Purpose’s data will also help asset owners and their managers align with SFDR in Europe and forthcoming Sustainable Disclosure Requirements (SDRs) in the UK, which are designed to eradicate greenwashing in investment products.
SFDR’s Article 9 classification cover funds with sustainability or reduction in carbon emissions as their objective. From next year, these funds will also be expected to disclose their alignment to the EU’s green taxonomy.
Duncan welcomes the slew of regulations that oblige more detailed ESG disclosures but warns that a lack of global standardisation continues to make life difficult for asset owners to keep up with their responsibilities.
“ESG, sustainability and impact standards are evolving and they’re starting to come together; I think we’re in the last throes, but I definitely want to see more standardisation so we are all on the same page.”
Duncan may well have been encouraged by recent developments, which have seen the newly-formed International Sustainability Standards Board formally agree to adopt a ‘two-pillar’ approach to disclosures, working in parallel with the Global Reporting Initiative, whose standards cater for a wider range of stakeholders than capital markets participants.
The Impact Investing Institute survey reports that nearly all (97%) struggle to find high-quality impact investing opportunities, an experience borne out by GIIN, which reported in 2020 that found average impact investments were limited to US3 million, excluding some of the larger institutional investors from participating.
However, Duncan says the signs are positive for an increase in bigger projects that will allow billion-dollar investors to make allocations.
“Impact investing is becoming more mainstream. We aren’t just talking about small projects in the developing world, it also means new large scale wind projects, or electrification projects in Europe, as well as in the US,” she says.
If private investors are to meet their role in filling the UN SDG US$2.5 trillion funding gap, more investors will need to embrace impact investing. Net Purpose could be an important tool that gives a wider market confidence to get their money working for change.