Collaborative Ecosystems in Sustainable Finance: Harnessing the Wisdom of Crowds
Financial markets are the primary directors of economic activity in a capitalist global society, but they also have an important societal role in encouraging investments that are beneficial to natural and human ecosystems. In sustainable finance particularly, decision-making by many small market participants, rather than a few dominant players, is crucial to overcoming the high cost of information gathering, due diligence, and impact assessment.
Last week, the Earth Institute’s Research Program on Sustainability Policy and Management discussed this topic at the panel event, “Collaborative Ecosystems in Sustainable Finance: Harnessing the Wisdom of Crowds.”
In his opening remarks, program director and professor Steven Cohen noted that we are seeing growing attention being paid to the term “sustainable finance,” both in universities and on Wall Street. Behavior can be greatly influenced by the availability and price of capital finance, and sustainability factors must be reflected in the world as understood by finance professionals in order to be real and not merely symbolic.
He also remarked that “given the global challenges we face, we need every sustainability practitioner in the room to succeed, and the culture of sustainability involves collaboration, not competition. The collaborative ecosystems concept tonight is meant to highlight spaces in sustainable finance where stakeholders can collaborate, rather than compete.”
Moderated by Satyajit Bose, lecturer and associate director of the research program, the panel featured Fan Gao, senior VP at CreditEase, one of China’s largest financial technology companies specializing in inclusive finance and wealth management; Julia Moshkin, senior CSR analyst at EcoVadis, which operates a collaborative platform that provides sustainability ratings for global supply chains; Amie Patel, director of Elevar Equity, a private equity and venture capital firm specializing in early stage and growth equity investments; and Alexander Laipple, director at Neighborly, an online investment platform that allows individuals to invest in civic projects through municipal bonds.
Though working in different spaces in sustainable finance, the speakers all noted their individual reliance on collaboration to improve their company’s performance and impact. Moshkin, for example, relies on players in the field to provide reliable sustainability data for EcoVadis’ online platform and takes advantage of data already in the public domain. Elevar Equity employees spend time with local communities seeking microfinance loans to learn firsthand how their customers are being impacted.
The panelists also shared common challenges, such as the complexity in bringing in other metrics to measure company performance. Bose questioned how we can replace metrics such as GDP growth, which has long been “put on a pedestal” as the ultimate measure of success. Laipple sees environmental, social, and governance (ESG) metrics as being very important for Neighborly in setting themselves apart from other investment banks, and their company actively monitors whether their deals are matching Sustainable Development Goals. Gao pointed out, however, the importance of measuring a financial metric alongside ESG goals; although social impact is always put in front of financial impact at CreditEase, a company that does not make money cannot continue. Proving that this is a viable business market, says Patel, is also crucial to attracting large private equity investors and achieving scale.
Bose recently co-authored a paper on the value and current limitations of ESG data for the security selector, which addresses the additional challenges of investors dealing with ambiguous evidence on the financial impact of ESG factors, as well as data sufficiency and quality challenges as obstacles to fast adoption of ESG integration. The article outlines the literature on the value-relevance of specific ESG metrics that demonstrates the business case for incorporating ESG information.
Kelsie DeFrancia is Assistant Director for the Research Program on Sustainability Policy and Management. Learn more about the work being done by the program at http://spm.ei.columbia.edu/.