Two challenges in leveraging ESG data towards creating new business models and reaching net zero
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At COP27 and generally in the debates around reaching net zero, data around Environmental, Social, and Governance criteria increasingly take center stage. Two challenges are on top of mind for many large global investment funds and corporations:
First, how should they effectively collect, structure, and analyze ESG data to set baselines and targets for investment decisions? KKR, among others, set out to determine this for the first time in 2021 with “Project Sand” for its portfolio. The company has made a commitment to embed “sustainability at the heart of how we source, diligence, finance, own and track companies“, as Philipp Freise put it today. The Norwegian Government Pension Fund Global (Norges Bank Investment Management) has developed almost a dozen public “expectation documents” as ESG guidelines for its portfolio companies, including on Ocean Sustainability (head tip here to Alexis Wegerich, PhD and his team and McCloy Alumnus Torsten Thiele). Then there are, of course, external organizations that compete to set potential standards, like the FSB Task Force on Climate-related Financial Disclosures (TCFD) , SBTi and others. But the fact remains, as John Galloway, CEO of Vanguard, said in a recent conversation on Investment Stewardship: “Quantifying climate risk at the individual company level, and tracking progress in mitigating those risks, is a work in progress. The lack of mature, standardized measures is a real challenge.“
The second ESG challenge to investors and corporations is not one related to the immediate practicalities of data, but to the board of directors, management, and leadership: how do executive boards need to change to resourcefully govern ESG progress, and, what is more, to create revenue and new business models out of the data? After all, as Dirk Schmitz, CEO of BlackRock Germany, Austria, and Eastern Europe, put it at the recent German American Conference at Harvard: “We are not ESG activists, we are fiduciaries of our clients and want to earn money for them.”
As an expert in the data economy and digital transformation, to me, these are stale questions. The parallels are so striking to the debates between a Silicon Valley-fueled data economy vs traditional industry, like car manufacturers in Europe. In fact, nowhere else do the green and the digital transformation merge more closely than in the area of data governance and data-driven business models: Ultimately, ESG data and reporting demand of investors and companies nothing else than a profound and comprehensive restructuring of their data governance, including potentially new efforts in data engineering and data science, the deploying of new privacy-enhancing technologies along the data value chain, and consequently also a stronger focus on cybersecurity. Those, who do this fast and skillfully and, in the best cases, are creative and bold enough to create new business models out of this, will decidedly have a competitive advantage.
Yet, nowhere else do investors and companies currently try to reinvent the wheel and leave more value - and money! - on the table: Some say as much as 40% of potential revenue is currently not realized. In addition, the imminent and highly invasive European data regulation, in particular, the upcoming Data Act, but also the Digital Services Act and AI Act, pose a high risk of even greater costs, if they are not conceptualized together with ESG. Currently, that is almost nowhere the case. Particularly many U.S. companies open themselves up to an avoidable geopolitical risk here. To digital experts, however, all of this is nothing new.
Perhaps that is the reason why many of the emerging leaders in ESG data are previous tech and digital leaders: Al Gore launched Climate TRACE, his GHG emissions tracking non-profit, with the help of Google and Schmidt Futures, the talent hub of former Alphabet Chairman Eric Schmidt. The Bezos Earth Fund, the Amazon founder’s philanthropic initiative, launched Systemschange Lab last week, which describes itself as a “platform designed to provide the private sector, policymakers, philanthropies, investors, advocates and global leaders with insights to drive policy, investment and action“. This week at COP27, the Bezos EarthFund also launched the Energy Transition Accelerator (ETA), together with John Kerry, the US State Department, and The Rockefeller Foundation. And finally, Mike Bloomberg, currently the face and central figure of ESG data standard development in investing and finance, was first successful with a data platform.
Three conclusions can be drawn from this: First, companies that can transform themselves into data-driven companies better and faster will have a decisive competitive advantage compared to those who cannot. My Yale University project Data Capital explores this in-depth. Second, those companies and investors will benefit the most that find ways to create additional value and business models out of the data which the ESG transition and the European legislation dictate them to collect, structure, and share anyways. Third, too few executive boards and investors take this opportunity to conceptualize the digital and the green transformation together.
Larry Fink in his 2022 Letter to CEOs predicts that “the next 1,000 unicorns won’t be search engines or social media companies, they’ll be sustainable, scalable innovators – startups that help the world decarbonise and make the energy transition affordable for all consumers” and adds that established companies should endeavour to do likewise. The playbook to be successful here comes from the digital transformation. Perhaps it is time to call in some data economy nerds.