This Tuesday, Seb and I represented Truvalue Labs at CDP’s 2016 Spring Workshop.  The theme was “Sustainable Innovation” focused on ESG data-related innovation, and the event was appropriately hosted on the Google Tech Corners campus.  Many influential members of the CSR and responsible investing (RI) community attended such as BlackRock and HP.  There were also many participants from the public sector, most notably the US Secretary of Navy Ray Mabus, who gave a rousing keynote speech.

 

Lance Pierce, the president of CDP North America, kicked off the event by questioning the conventional wisdom that we already have all the technology we need to transition to an environmentally sustainable and socially just economy.  He pointed out that while energy transformation technologies such as wind and solar are now readily available, the development and usage of information technologies for CSR and RI are still in their early stages.

 

Corporations, investors, and governments are now fully aware that they can and should take advantage of the low cost of computer power and data storage as well as advancements in artificial intelligence.  Data analysis tools such as software packages for data cleaning, machine learning, or natural language processing are now readily available.  Selecting and using the tools require proficiency in statistics and engineering not to mention domain expertise, but in any case, there are many more relatively low-cost tools and techniques to choose from. This not only makes it easier to detect insights from the data but also easier to use “unstructured” data such as social media posts.  These developments were originally driven (funded) by online advertising, but now the tools and techniques are penetrating other fields as well.

 

Presenters described how they’re using data now and what still needs to be done, and I became ever more aware that our collective efforts will transform business and investing.  Microeconomic theory describes how prices communicate information so that resources are allocated efficiently.  The best (most economically efficient) way to take externalities into account is to impose a tax so that the externality is internalized.  Specifically, businesses and investors should be internalizing the costs.  The problem is that up until now, it’s been very costly to determine what the tax should be, even more costly than the tax itself depending on the issue and region.  Information costs include changing processes and reporting performance by businesses; both businesses and investors share verification costs to some extent; and assessing the reported data is costly and time-consuming for investors.  Most of these activities can now be automated, which will make it more likely that benefits to corporations and investors will outweigh the cost of collecting it.

 

Here are some examples featured at the workshop:

 

  • Cargill has been equipping farmers with data analysis tools including satellite imagery to help farmers manage their plots sustainably.  They can reduce fertilizer usage without hurting yields and plant crops that are particularly suited for the soil and weather conditions.
  • Companies such as HP and Cisco have been engaging with their suppliers to make sure they are contributing positively to the communities they operate in so that they are resilient to natural disasters as well as economic shocks.  In the chart below, you can see that Cisco indeed has consistently better Supply Chain scores than its peers in the Electronic Technology Sector.
Cisco's Supply Chain Scores vs. Sector
  • Investors such as UBS have started using social media and local news media to measure the outcomes of corporate supply chain management. This will reduce the amount of corporate reporting and verification needed so that corporations can focus on actually making their supply chains more responsible.
  • Google Earth and Orbital Insight have been scrutinizing forest management practices using satellite imagery.  They can detect when trees are cut down automatically, empowering corporations to address deforestation in their supply chains effectively.  Companies will no longer need to rely on their suppliers’ word, costly oversight programs, or government regulations.

 

These efforts show that cheaper access to data and data analysis tools have the potential to make production and investment much more responsible.  Incorporating ESG data should help markets work better; in service of more stakeholders and for longer time horizons. Lowering the cost of information (data + tools) could thus be considered a third type of policy intervention as opposed to command-and-control (banning particular practices) and market-based (taxes and subsidies) regulation.  Many organizations in the private and public sector have been instrumental in forming and curating this intervention, for example by organizing workshops at Google.  Thanks again CDP, for the great event.  We at Truvalue Labs are excited and proud to be part of the drive for better ESG data and insights.