Human economic activity is one of the primary drivers of the degradation of the biosphere. Some investors are using ESG (environmental, social, and governance) data to address this yet the highest ranking ESG scores from companies are still pointed in the wrong direction. The ESG investing trend started in the mid-1990s and has been gaining traction. By investing in companies that disclose social and environmental impact information, as well as governance factors, investors aim to minimize their risk and improve social and environmental outcomes. However, at present, ESG data is mostly limited to indicators of “less harmful” activity. For example, biodiversity data generally shows how well a company is monitoring its impact on various species, such as threatened species. Yet we need to not only slow down biodiversity loss but reverse it. Doing “less harm” is clearly not enough. Human economic activity has resulted in the biodiversity loss, habitat destruction, and environmental degradation that are now pushing the global biosphere to the brink of catastrophic collapse. We need to normalize industrial practices that will restore, regenerate, and reinvigorate ecosystems. The current state of ESG investing is akin to driving off a cliff less rapidly, versus changing course to avoid the cliff. There is a serious reality gap in ESG investing, and it is contributing to long-term degradation of our biosphere. We can change this.
Our solution is the RegenX Scenario Tool and Interactive Investor Guide. It provides a new, science-based benchmarking and guidance package to cultivate a new mental model for investors, putting current ESG reality in context. The product will comprise cross-sector data analysis, degenerative versus regenerative scenarios, and supporting narratives to guide investors towards regenerative investments. It will serve investors by potentially reducing risk in their portfolios and surfacing new opportunities. The ESG investing market was $30 trillion in 2018, and is set to grow to $50 trillion by 2050. It is essential that this capital flows to companies that are truly regenerative - those that net sequester CO2, increase biodiversity, and improve social well being. Our approach is based on the ‘Information’ lever of behavior change (behavior.rare.org) for investors: add regenerative data to contrast against today’s degenerative data. This will trigger other levers such as ‘Choice Architecture’ as regenerative framing becomes mainstream. Our product will initially explore three sectors relevant to global deforestation - consumer goods (including food), mining, and forest products. It will build on the methodology in https://www.blorrainesmith.com/post/a-letter-to-blackrock-ceo-larry-fink. We will use examples of real companies to show the potential of a regenerative mindset. Rather than “naming and shaming”, we will illustrate a powerful positive path forward.
We have correctly observed that current ESG measures do not adequately capture positive, regenerative impacts of economic activity.
Investor choices can and do affect how companies interact with the environment in the places they operate.
An impactful number of investors rely upon ESG data as a key driver of decision making.
An impactful number of investors who currently use ESG data to drive investment choices do so, at least in part, out of a desire to contribute to the well-being of the earth and the environment.
Investors will change their behavior based on evidence.
The data and visualizations in the RegenX product will effectively demonstrate the gap between current approach to ESG data and the actual outcomes we need to conserve and regenerate our biosphere.
When investors see the negative impact of the gaps in current ESG data, they will begin to demand data and analyses that address the gap.
The data and visualizations we select will appropriately and compellingly demonstrate the gap between outcomes desired by investors and those selected for using current ESG measures.
Our dissemination efforts will mean an impactful number of investors will experience and apply the insights in our new interactive scenario tool.
ESG investing was originally developed to reduce the negative impacts of economic activity. Current ESG data, however, provides investors with inadequate access to measures of positive (regenerative) impact, such as indicators of net CO2 sequestration, biodiversity increases, and net increases in social well being. This makes it difficult for investors to recognize and choose companies engaged in regenerative practices. Furthermore, some investors don’t even realize that this essential data is missing. Traditional investing incentivizes short-term returns without regard for negative social and environmental impacts. Current ESG investing is better, but it is not good enough. Our solution offers a reframe of what it means to be a successful investor. By showing investors the data they could apply, and the positive outcomes that can result, we will show them that it is not only reasonable to seek data indicative of a regenerative company, but essential.
CUSTOMER DEVELOPMENT (Months 1-3) 1. IDENTIFY ESSENTIAL VARIABLES, THRESHOLDS & DATA SOURCES FOR REGENERATIVE BEHAVIOR - Review existing scholarship & corporate benchmarks - Draft first set of essential variables and thresholds - Test & refine the draft with input from key influencers in ESG 2. DEVELOP ALPHA VERSION OF SCENARIO TOOL & INTERACTIVE INVESTOR GUIDE - select & compile profiles of 15 companies relevant to global deforestation (initially) - explore technologies to scale and enhance profile generation (e.g. machine learning, AI) - create data visualizations & narratives for each company 3. ALPHA TEST - identify & engage at least 10 investors to test the product, provide feedback - conduct investor & market influencer research PRODUCT DEVELOPMENT (Months 4-6) 4. ADDITIONAL TRIALS & OUTREACH - marketing analysis to identify likely first adopters - scale outreach, raising awareness re: regenerative investing - run iterative trials & incorporate feedback 5. LAUNCH BETA
Impact investors, institutional investors and other asset managers will be engaged in the creation of the RegenX product to optimize the product-market fit. We will then run communication campaigns to inform ESG data buyers and decision makers within ESG data organizations such as Arabesque, Future-Fit Foundation, Harvard Business Review, Sustainable Brands, Sustainalytics and the UN Global Compact which represent significant channels to investors. Investors will use the scenarios and guidance to seek out more information about net regeneration. This will incentivize and eventually compel companies to shift towards regenerative practices and - even more significantly - companies that are already creating value through regenerative practices will be capitalized appropriately.