The quest to make companies care about the climate is a decades-long struggle, but technology, particularly AI, represents a transformative opportunity to put a company's net purpose in the same conversation as their net profit. The secret? Follow the money.
In 2021, the world's largest ESG rating company admitted that it doesn’t even try to measure the problems that a company might bring to society and the climate. Instead, the focus is all about how those problems could reduce a company’s profits.
Impact investors exist to make the world a better place, but without accurate ratings on how a company affects society and the environment, that job is next to impossible. It’s a job Sam Duncan knows all too well. “I want to build a tool for my former self,” the investor-turned-entrepreneur says on Curation, the Culture3 podcast.
For six years, Sam had led the impact team at LeapFrog, an impact investor that helped pioneer the field after being launched by former United States President Bill Clinton in 2008. A steward to half a billion dollars worth of total assets, measuring the impact of a portfolio is an arduous process. It involves pouring through thousands of pages of sustainability reports, drawing out statistics, graphs, measurements and more to help investors measure what’s really going on.
“This was not going to work at scale.”
— Sam Duncan, founder and CEO, Net Purpose
In truth, the practice of evaluating companies based on their environmental, social, and governance risks has been like this for decades. ESG is a modern descendant of the socially responsible investing movement, which began to crystallise from 1990, when investment analyst Amy Domini launched the Domini 400 Social Index.
But to remain relevant at a time when investors weren’t really thinking about the need to invest in sustainable companies, the concept evolved into a measure of how a company’s ESG performance could pose risks to its shareholders, rather than the other way round. In the 1990s, for example, the Domini team conducted research by reading “ESG-related company controversies from major newspapers”; a company would rank poorly not if its products were bad for the environment, but only if the media found out.
Whilst impact investors today are more likely to be interested in a company’s impact on the world, their method is not much different to Domini’s newspaper sleuthers. Holding down Ctrl+F to find mentions of the word “emissions” in a 200-page report is just the modern version of flicking through newspaper clippings in the 1990s.
A former investment banker at Goldman Sachs, the data Sam had access to as an impact investor paled in comparison to what she could use as a financial investor. “At Goldman, I used all these tools to grab facts on the financial performance of companies. My job was to analyse that information, not ever collect it from scratch.”
As she looked around the impact investing industry, Sam realised that she was in a completely different world. “Most people were literally punching numbers from a PDF file manually into an Excel spreadsheet, and then shipping that over to someone else,” the Australian recalls. “This was not going to work at scale. It became very obvious that someone needed to build the infrastructure to power trillions of dollars of sustainable funds. If we don’t, we’re going to miss the moment.”
Rather than missing the moment, Sam founded Net Purpose to seize it. Active since 2019, the platform now provides data on almost 5,000 companies, each with hundreds of data points, and is used to inform investing decisions for over $100 billion worth of impact funds.
Traditionally, that level of coverage would have been impossible for a company with fewer than 50 employees. Done manually, Net Purpose would rack up millions in costs to sustain a far larger team. Sam opted for a different route, and following the hiring of "mastermind" Chief Technology Officer Alex Woodham in 2020, the company has automated 55% of the process required to confidently identify a data point from reams of lengthy and disparate sources.
With investors for customers, the pressure is on to ensure that every data point is “investment grade’”. “Every single fact needs to be accurate and completely transparently sourced back to the filing it came from,” Sam explains. Such are the standards you need to meet if you want to impress the world’s leading financiers. “We really take no chances.”
The team has come a long way since scrolling through reports around Sam’s dining table. Now, the majority of Net Purpose’s human-in-the-loop process is performed by artificial intelligence software and other related tools, like optical character recognition, which has transformed the number of companies they can cover (and the depth with which they can cover them).
Having automated much of the process, Net Purpose have pushed down the cost to produce a given datapoint by almost two thirds. And as the company trains their models and applies new technologies, Sam expects that cost to decrease further. “We expect exponential increases in productivity over the next couple of years.”
“If we didn’t have machines, it would take a very long time to cover every company in the world.”
— Sam Duncan, founder and CEO, Net Purpose
“The impact of automation is that the cost dramatically decreases and the speed dramatically increases,” she adds. “If we didn’t have machines, it would take a very long time to cover every company in the world.”
Ultimately, that could power sustainability data not just for impact investors, but for the entire world. “Every time I buy something,” Sam says, “I ask ‘how sustainable is this company?” She’s not alone: over 60% of consumers factor sustainability into their purchasing decisions, rising to 83% for the most spendthrift. “What would be even cooler is if the data fed through to the online platforms that I buy stuff on, like imagine if Instagram could tag their ads and tell me ‘this is a sustainable company’.”
Sam’s point is that, compared to financial data curated for financial companies, Net Purpose’s datasets are “infinitely more useful”, not just for investors, but for anyone who cares about the environment. “When I buy a sweater,” she explains, “I don’t think about the earnings per share of the company, I think about whether they’re environmentally conscious.” In time, Sam wants Net Purpose to be able to drill down to “the CO₂ impact of the clothing you just bought, or the apple you just ate”, analysing environmental impacts on a product-by-product basis to help consumers “make useful consumption decisions.”
For now, however, the focus is on investors. “They are the ones that need to mobilise trillions of dollars to achieve the SDGs,” she emphasises. Her main priority is to make impact investing so “effortless” that “social and environmental performance will be incorporated into investment decisions, just like financial performance.”
Encouraged by the dovetailing trends of regulation and consumer consciousness, she looks to a future in which “every investor will be a sustainable investor, just like every investor today is a financial investor.” Continuing, she adds, “if we are successful, we will help that happen really quickly, we’ll be allocating capital with an entirely new lens, and we’ll be helping change the code of capitalism to a more sustainable form.”
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