After a morning of keynotes and ‘speed dating’ roundtable sessions, SustainableFinance.Live attendees broke out into whiteboard sessions where they learned by doing, workshopping scenarios to create tangible results.
Attendees had an option of three sessions: the first where they would learn how best to design a product that merchants can use to understand their supply chain data with ESGs in mind, the second in which they explored how to design a green commercial bond product end to end in the most efficient way and the third was focused on minimising data entry and duplication, resulting in a new design for the reporting process.
Supply chain data
Launching into the collaborative workshops, Nick Wise, CEO, OceanMind began the session by working through the quandary of sculpting sustainable supply chains with a question: how can we use supply chain data to help consumers make decisions?
First identifying that demand for progress towards sustainability is imperative, we need to see ‘bottom-up’ pressure from consumers concurrently with ‘top-down’ pressure from banks and regulators.
The group recognised that building a ‘new value chain model’ is not necessarily the most practical approach. Rather, building upon the systems and technology already in existence to develop an ESG matrix holds the potential to revolutionise the experience - commercially and otherwise - of each player across the value chain.
Such a matrix could be worked into the contractual relations already undertaken between parties in the chain, requiring that data sets which are specific to each link in the chain (for whichever ESG purpose is being targeted) are provided.
However, as Wise pointed out, if we want to drive ESG efforts across supply chains, how do we assess the impacts and work through them? More importantly, how do we make the big players in the chain care?
A challenge persists as the model will only succeed on the proviso that each party is happy to provide this data. Given that neither the consumer nor the retailer is likely to volunteer to bear an extra cost without good reason, the group looked to public instances where a shift in outlook has been achieved.
Examples of large corporations suffering immense consumer pressure upon the leak or release of controversial information about the reality of product origin where listed one after another. What became a point of consensus in the group was the idea that when the consumer is provided with information that is prescient to their personal value sets, behavioural shift and demand will follow.
Financial institutions, another key player in the chain, who risk suffering acute reputational damage are all but guaranteed to fall into line with consumer demand.
Rather than relying on loose reporting standards which have historically offered ‘watermelon outcomes’ (green on the outside, red on the inside), by setting out a matrix that demands answers to ESG questions and identifies the intrinsic value points of each member in the chain, consumers will be better placed to make informed decisions, driving demand from the bottom up, which in turn steers the product chain to fall into line with their preferences.
The group concluded that given the rich data we already have access to there are opportunities for financial institutions to look for opportunities. They can position themselves to pick out the treasure and de-risk existing financial products. This is precisely the value of this matrix approach.
We would be able to see where a concentration of certain information is clear and by identifying where we can de-risk, the process will allow greater liquidity as costs once allocated to determining risk now freed up, allowing smaller players in the chain to be both protected from exploitation and liberated to make informed commercial decisions.
Led by Matt Smith of agrifood big data platform, Agrimetrics, a group of finance and investment professionals wrestled with the lifecycle of a green bond and the pain points encountered along the way.
Issuance is broadly hampered by a lack of holistic clarity surrounding sustainable finance. Nobody clearly understands what being sustainable will cost and there is a lack of concise data to objectively define what can be classed as green investing. It is also unclear what a successful outcome would look like in terms of end return.
“There are multiple problems and they can’t all be solved at once,” Smith said. “We know that the destination is on the other side of the river, but nobody’s sure about jumping in and swimming across.”
All investment projects require a party that needs money, a party that has money and intermediaries to connect the two, providing the data and transparency required to satisfy both.
This structure is 200 years old and ultimately the status quo will win through. While there is demand for green investments, supply is hampered by broader uncertainties.
The natural lifecycle of a green bond would be long and complex requiring the buy-in and expertise of multiple parties. First, its issuing bank or enterprise would identify the investor demand and market it to said investors, while investment banks would be required to underwrite and execute the bond sale.
Numerous external parties would also be needed to review the project’s sustainability impact, verify its alignment with regulation such as EU taxonomy, audit its progress and review its success on maturation.
The orthodox timeline of the bond market therefore is not conducive to the urgency of addressing the world’s problems that investors may feel, suggesting investor demand would be tough to satisfy.
“Should we just figure out a way of doing this completely differently rather than trying to make slight improvements to the individual stages in the process?” Smith posed, asking the attendees what they would do if they had $10 million to invest.
They unanimously said they would pour their money into new innovative businesses that can fundamentally alter the lifecycle of the bond market, deciding that a disruptive business model is required to cut through some of the steps and intermediaries of the bond’s lifecycle.
Technology harnessing AI and DLT can aggregate the data required to report on a bond and demonstrate its sustainability while also offering the transparency that investors will demand, while removing many of the overheads that could eat into returns and deter further investment.
Data and reporting
Closing the day’s sessions, Elastacloud’s Richard Conway chaired the whiteboard session on minimising data duplication and the future of reporting in consideration of ESG factors. The group surmised that while there were far too many reporting standards in circulation, many carried a lack of integrity and oversight, especially in an industry that distrusts.
There are also issues with bias, materiality and fragmentation. Beyond the data that is available, there is also the interpretation of it. How do we know what the algorithm is doing?
There needs to be a responsible debate about this, what you want to achieve and why.
While there are two major players in this space: MSCI and Sustainanalytics, overarching governance is crucial. Using trade finance as an example, the group set up a reporting dashboard to provide an effective management summary, considering the level of detail that needs to be established.
The consensus was that there needs to be more intuition involved in the decision-making process and less automation. The beauty of green finance is that it is driven by sentiment, which drives different sources of investment, which in turn, drives different criteria, constantly generating predictions, mining data and shifting supply depending on consumer demand.