Environmental, social, and governance (ESG) – now sets the tone and pace for boards and investors alike and not just for ethical reasons. ESG has been shown, repeatedly, to drive increased performance, increase profitability, and improved client relations. Unfortunately, there are significant challenges to quantifying ESG, to know how a company is performing in this area – this is the “ESG data gap”
Across the EU, firms with higher ESG scores tend to show increased returns. In the US, there aren’t just higher returns but also increased stability and reduced volatility. The same results have been seen across Asia and Australia.
There has been a surge in investment during the pandemic, with an additional $71bilion moving into the ESG funds between April and June alone. This brings the total ESG assets under management to over $1tillion.
This has been put down to multiple reasons, including:
“ESG weeds out unsustainable companies with outdated practices and harmful side effects, while also minimizing risk for investors as they invest in more responsible companies with a greater likelihood of succeeding in the long run.”
- Environmental – Consider how a company works with the environment across multiple regions, including:
- waste and pollution
- resource depletion
- greenhouse gas emission
- climate change
- Social – Determine how a company manages its relationships with employees, customers, and the community where it operates. This includes:
- employee relations & diversity
- working conditions, including child labor and slavery
- working with local communities – including poor and underserved communities globally
- Governance – The company’s leadership, executive pay, internal affairs, shareholder rights, and transparency regarding finances.
- donations and political lobbying
- corruption and bribery
- tax strategy
- board diversity and structure
The Data Gap
Measuring governance is reasonably straight forward and is based on the company reports and additional data. The social measure can also be reasonably calculated based on standard reporting. However, measuring the environmental impact is far more challenging – especially for companies with long and complex supply chains. This is the “data gap” that is such a critical issue for ESG – and raised by 63% of fund managers and a wide variety of industry experts from BNPP and Refinitiv to the OCED.
There is no single solution to the data gap, but satellite data can undoubtedly provide coverage in many areas or many industries.
Satellites continuously measure and map the entire earth every day, from optical imaging (photographs) and radar to spectroscopy and thermal sensors. This data can be used to set benchmarks and measure the impacts of companies.
Deforestation is one of the most visible forms of environmental damage with illegal logging and deliberate forest fires worldwide.
This activity if of conducted to free up the land for agricultural purposes or obtain low-cost products, such as palm oil, for higher profits.
These activities are not conducted at the request of well-known brands, but their suppliers acting against policies. Due to the “data gap” it is hard for companies to know how and when this occurs. Satellite can provide a clear solution to this. Satellites are continually imaging forests and can detect even small changes in land – preventing deforestation. Recently the Norwegian government invested £40million into providing even more data to help better monitor forests.
Crops are critical not just to feed the world but for businesses outside of the key food supplies: Cotton for clothing, sugar for drinks, and coffee. In all of these cases there are scenarios where illegal or unethical farming practices pose a threat to the environment and the local population. S&P estimate that these industrial farming practices cause $3 trillion of environmental damage every year.
Sugarcane fields are illegally burnt, cotton and coffee can be grown using forced labor, and intensive farming can involve mistreatment of animals, pollutants in rivers, and even the theft of land.
All of these issues can be monitored and detected by satellites – helping close the data gap.
Pollution of land and runoff into rivers is a significant challenge for multiple industries – from fertilizers used on farms to the chemicals used in the clothing industry.
Monitoring these pollutants, and their impact around the world is key for a business to understand and make changes. Satellites enable this type of monitoring, from seeing the impact of pollution on crops to the impact on rivers.
Mining is critical to the economy, from the production of copper and iron to drive construction and engineering, to the extraction of rare earth for electronics. Mining can also result in a considerable toll on the environment from metal contamination in rivers to increase sediment levels in streams, and acid mine drainage.
For global mining firms, this is a real challenge. With third-party contractors working around the world in remote and dangerous locations, identifying which supplier is not following their ESG policies is complex, due to a lack of available data.
By using satellite data the companies can monitor their suppliers, detect improper mining techniques and take action.
The burning of fossil fuels primarily produces Nitrogen Dioxide (NO2), which has a significant impact on human health. Satellites are continually tracking the levels of NO2, over towns, cities, and countries, with incredible accuracy – showing the immediate effect of changes in pollutants’ policies – allowing governments and companies to understand and measure their impact on the environment.
This is the second most potent greenhouse gas. Methane (CH4) emissions levels are at an alarmingly high level, the highest for over 800,000 years and still increasing at 1% per year
Responsible companies are taking steps to minimize their emissions and satellites play a crucial role in this. Satellites can help identify the source and impact of methane. ESA’s Sentinel-5p provides the ability to monitor methane, and more dedicated monitoring is being deployed. “MethaneSAT” a new satellite being launched in 2022 will provide high-resolution detection methods for methane.
Satellites constantly collect data on almost every aspect of the earth every day. Temperature on land and sea, humidity, glacier movement, ice flows, vegetation analysis, and forest fires.
This data can show the impacts of humans on the environment which can help companies, investors, and customers, to make well-informed decisions.
The ESG data gap is not going to be suddenly changed, there isn’t going to be a silver bullet to address all of the challenges. There will be a series of incremental solutions, many of which are already available. Satellite data addresses a lot of the data gaps and reduces the costs of data collection. For some areas satellite data is not just the best way to monitor ESG, it’s the only way.