It is easy to take for granted much of the information we now have at our fingertips. It wasn’t so long ago that an investor, seeking information on a potential new stock, would contact the company to request a copy of its annual report. The investor would then wait patiently for the postman to deliver the report, before poring over its many hundreds of pages in pursuit of a few key figures.
Well into the so-called ‘Information Age’, investors now have a much easier job of obtaining traditional metrics on potential investee companies, but there remain gaps in the information they can gather – especially when looking deeper into a company. This is particularly true for companies which rely on complex supply chains to source raw or processed materials from parts of the developing world.
Investors, regulators and lenders are increasingly keen to understand exactly what is happening in each and every part of the supply chain – particularly in relation to environmental, social and governance (ESG) issues – and the expectation is that companies will deliver the levels of granularity required.
Furthermore, this ESG information could be used to more intuitively structure financing – designing packages linked to the sustainability ratings of a supplier, creating incentives to address issues and ultimately raise productivity.
To address these issues, the finance industry is increasingly turning to new technologies. Indeed, in its recently published Action Plan: Financing Sustainable Growth paper, the European Commission argues for increased transparency underpinned by innovative technology. This could enable retail investors to make informed decisions and have accessible information on sustainable finance.
One technology currently being tested in this sphere is blockchain, also known as distributed ledger technology. The UK Department for International Development’s UK Aid is currently supporting a project testing whether blockchain, and other financial technologies, have the capacity to create the financial incentives which will reward sustainability in supply chains. The aim is to deploy smart contracts and algorithms that convert supply chain data into preferential pricing terms in banks’ systems.According to details released last December, the pilot will use a shared data system that could reach more than 10,000 Malawian tea farmers who supply Unilever, an Anglo-Dutch consumer goods company, and Sainsbury’s, a UK supermarket. The quality and relevance of the sustainability data that is material to the assessment of risk, and which is not currently available in existing systems, will be critical to the success of the pilot.
Projects such as the Malawian tea supply initiative – which was developed by the Fintech Taskforce convened by the University of Cambridge Institute for Sustainability Leadership – are taking place around the world and present an exciting development for companies tasked with providing ever greater levels of transparency.
Matching powerful new data and processing tools with the most pressing sustainability issues – whether those are social issues linked to inequality, or environmental issues caused by the blackspots in supply chains – is a demonstration of the power of utilising technology for human progress.
At a more prosaic level, projects like these should also be music to the ears of institutional investors who are increasingly expected to understand what is under the bonnet of the companies in their portfolio. The result isn’t necessarily that investors can use this information solely to weed out bad practice or penalise companies. A better and more desirable outcome is a situation where companies, banks, investors, regulators and other stakeholders use this information to engage behaviours and raise standards. This will create a virtuous cycle of disclosure, information capture and increased investment.
We are on the cusp of a second chapter in the Information Age, and one which should hopefully help us to turn the extremely great power of technology to ever more positive means.
Amine Bel Hadj Soulami is Global Head of Sustainable Investments, BNP Paribas CIB