Data Verification in Green Finance: Leading to the Next Subprime Mortgage Loan?

Summary:

• As it stands today, data verification in green finance is a highly ambiguous and untrustworthy process.

• Currently, there are no widely acceptable standards to audit and verify data for green finance.

• Every day, investors put $3 billion into asset funds that have an environmental emphasis, and $5 billion in bonds and loans are issued to tackle green issues.

• Green finance is no longer a fringe investment, having reached multi-trillion dollars status, but this also comes with issues of transparency and accountability.

• Inconsistent standards, a lack of verifiable data, and difficult-to-understand metrics are all critical factors for this lack of transparency in green investments.

• Solving these issues using consolidated frameworks and verification technology like blockchain is key to achieving the world’s decarbonization goals. Our future depends on this.

• REANGLE is on a mission to combat these issues by introducing our own green data platform for our partners and customers.

Green Finance Has a Trust Issue

The world of green finance has a big issue: Trust. The entire process is currently muddled with varying frameworks, impossible-to-verify data, and high levels of subjectivity in how companies do their reporting about achieving their carbon reduction goals.

This is an issue of ambiguity, credibility, and rings of a certain subprime mortgage loan crisis we had already encountered not too long ago. Not only could this be a major hinderance to the world’s ability to meet decarbonisation targets, this truly threatens the trillions of dollars already invested into green businesses.

On this week’s edition of Insights at REANGLE, let us explore how these problems arose in the world of green finance, and what we can do to combat them.

Where is the Renewable Energy Gold Rush Leading Us?

If you still think that climate change and renewable energy are issues only “woke millennials” think about. We have news for you. Over the past few years, the green sector has been experiencing a meteoric rise like it has never seen before due to the uplift of trillions of dollars pouring into ESG investments. Yes, that’s trillions with a “T”.

Bloomberg estimates that ESG assets could hit $53 trillion by 2025, up from $37.5 trillion by the end of 2021.

Meanwhile, The Wall Street Journal reports that every day, investors are placing $3 billion of their money into asset funds that have an environmental emphasis, and $5 billion of bonds and loans are issued every day to tackle green issues like climate change.

That said, with all this money rushing into renewable energy, we have to pause and ask ourselves an important question: how do we know if any of this money is actually helping anything?

Facing the Tough Questions: A lack of consistent standards and verifiable data

With all the time and resources pouring into any business resembling any shade of green, it is important for investors, governments, and us in society to demand to know whether any of these businesses are actually producing an outcome that can be considered truly sustainable. Or all those trillions of dollars would have simply been wasted.

Corporate sustainability governance, the process of evaluating a company’s actions related to issues including environmental ones, is the method through which we can have many of our difficult questions answered.

As companies measure, evaluate, and report on how their business has mitigated against environmental risks, we should be able to find the answers we need. Right?

Unfortunately, the answer is a resounding, “No.”

Already, we are seeing major problems with corporate sustainability governance. The two biggest issues we are starting to notice are: a lack of consistent standards, and a lack of verifiable data.

No Standards: When the Meaning of “Green” is Lost

First, there still are no universal standards we can use to measure what is green and what is not. Imagine if there was no agreed-upon standard for what a centimetre is – we would have everything from hundreds of silicone cases that don’t fit your iPhone to planes crashing into the ocean every day.

But this is precisely the problem corporate sustainability governance is facing. There are no standards or frameworks that everyone has agreed to use, and all this has led to is highly confusing messaging.

Third-party sustainability auditing and reporting services from companies like Sustainalytics and RepRisk are meant to provide increased transparency and reliability in corporate sustainability reporting by evaluating a given business’s activities carefully and assigning them a well-reasoned ESG score. But due to the use of completely different frameworks that do not share the same metrics and weightage of said metrics, a single company can have vastly different scores depending on who is evaluating; for example, the Bank of America has an ESG score of "below average" by RepRisk, but is "well above average" in the score given by Sustainalytics.

If ESG scores were to reflect as much objective analyses about an individual organization’s sustainability efforts as possible, then multiple audits from different reporters should not differ so greatly in their assessment of that organization. This means their intended purpose is not being served – to be tools to communicate to stakeholders about whether or not a company is truly acting in a sustainable fashion.

No Verifiable Data: An Issue of Trust

The second part of the issue is much easier to understand – there exists no publicly-accessible proof of anyone’s claims for actions related to carbon reduction and sustainability.

These circumstances, packaged in a completely different way, will come across as something else entirely. Imagine being sent an email by someone claiming to be a Nigerian prince, telling you a bank transfer of $1 million awaits you if you could just so kindly sign your name on the dotted line and provide your online banking login details…

This is the same kind of “opportunity” green investors, regulators, and consumers are signing up for if we continue to ignore the lack of verifiable data in areas including renewable energy production, purchase, usage, and quality.

According to Greg Medcraft, the Director for Financial and Enterprise Affairs at the OECD, unverifiable data is a real material risk for both achieving climate goals and making sound ESG investments, and horrifyingly in some ESG reports, “high environmental scores correlated with higher emissions”.

To put it very simply, we can only make evidence-based decisions if we have the evidence we need.

Solutions to the World’s Most Expensive Game of Schrödinger's Cat

The future of our world reaching decarbonization all hinges on how much we can actually hold these green businesses accountable. If we simply ignore the problem, we would just be playing the world’s most expensive game of Schrödinger's cat – never knowing if our investments into renewable energy are going to save us or kill us.

These problems can only be addressed with two important solutions: consistent, easily stood standards and metrics for what is “green”, and a method for us to verify the quality of renewable energy produced.

The first part of the equation is already being slowly addressed, with some of the biggest players in the world already taking the lead.

BlackRock, the world’s largest asset manager, has their open letter to the world of ESG investing titled “Towards a Common Language for Sustainable Investing”, in which the company outlines some key steps investors, regulators, and businesses need to take in order to start creating standards and frameworks that are consistent, easy to understand, and meaningful. This, according to BlackRock, needs to involve consolidating frameworks, using objective measures that allow for assets to be compared by investors, avoiding binary definitions of sustainability that limit investor choice, and more.

Apple, similarly, has standards that it holds its suppliers to, as it outlines in its report titled “People and Environment in Our Supply Chain”, where it highlights how over 110 of its suppliers have committed to scaling to use 100% renewable energy, among other goals. Its internal frameworks are what it uses to place pressure on players in its supply chain to comply, and should be used to hold other brands’ manufacturing supply chains accountable.

The solution would therefore involve using these industry-leading frameworks and consolidating them to form universally understandable definitions for what is sustainable, ESG, and green, so such definitions can be much more clearly communicated and easily followed.

Blockchain: A Go-To Solution to Data Verification

Second, verifiable data is essential for stakeholders such as governments, the media, investors, and consumers to be able to trust businesses and hold them accountable when it counts. New ground is being broken in these areas, particularly in the field of using blockchain technology.

Distributed blockchain ledgers are not only not centralized in one location (which means they are practically impossible to be tampered with), they can be configured to be publicly accessible so anyone with the right permissions can view individual pieces of data or when specific transactions of data occurred. This is critical for the renewable energy sector, since there are currently very few good ways to actually allow external stakeholders to take look behind the curtain at what constitutes “high quality” renewable energy – we only ever see the certificates or ESG ratings claiming it is so.

Green Finance is the Next Subprime Mortgage Loans?

Currently, there are some initiatives to use blockchain to verify the consumption of renewable energy and even Spanish oil company Repsol has started to investigate the use of blockchain ledgers to store digitally-accessible, traceable, and verifiable proof of its renewable energy efforts, particularly since most of the energy sector still relies on analogue tools to perform similar levels of monitoring.

Use of digital verification methods and technologies will be essential to build trust and confidence in green assets like renewable energy companies, carbon credits, and green bonds, since right now, everything is all based on the word of auditors and businesses. And we all know what happened with supposedly highly-rated subprime mortgage loans.

A Problem or a Business Opportunity

As the saying goes, “A consumer sees a problem and complains. A businessman sees a problem and builds a company.”

At REANGLE, we realize the issue of transparent, easily understood, and verifiable sustainability reporting is not just important, it is not going to fix itself. As consultants for both digital transformation and green business development, we see an opportunity to make a big change that can value-add to both our partners and society.

REANGLE’s Green Data Platform for Green Finance

Through 2021 and 2022, our company is excited to be working on an ambitious project to connect players in the renewable energy ecosystem to one another. We are embarking on a mission to collect and distribute our data on energy generated, quality, and purchased on a publicly-accessible ledger via blockchain, which can be used by everyone from prospective green investors, to renewable energy purchasers, to members of the general public looking to verify the renewable energy claims made by businesses.

This green business platform for verifying and connecting data would not only allow for trustworthy data on renewable energy to exist in a manner that cannot be fudged or tampered with, we will use these data-related services to build tangible partnerships in the renewable energy space as business consultants and digital service providers.

Our company will continue to release updates as this project materializes, but for now, our sights are set firmly on the future of the renewable energy sector.

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About REANGLE

Our mission is to bridge the gap between deserving talent and opportunities, particularly for digital and green businesses in the Asia-Pacific region. Contact REANGLE for digital talent development, business development and transformation, or consulting for green companies via LinkedIn message.