Following May’s news that Nossa Data closed a £1.2M Seed Round, Co-Founder Julianne Flesher returns to discuss how ESG reporting is evolving and why better definitions are needed.
Environmental Social and Governance (ESG) regulation in 2022
At the beginning of 2022, it became law that listed issuers must disclose their climate-related risks and opportunities. In April, reporting became mandatory for the largest UK-registered companies.
ESG regulation reduces greenwashing, improving transparency and driving investment toward sustainable companies.
In a complicated and shifting landscape, many investors rely on third-party ESG data providers like Nossa Data. These third-party providers help analyse and report metrics. However, questions persist about the validity of these metrics and the scoring methods.
What does ESG mean for businesses?
While there is a temptation for some companies to buy some securities in an environmentally sustainable company and stick them into the company’s fund, this is limiting. There is so much to consider beyond these actions, especially when it comes to greenwashing. Julianne struggles to imagine how a company would manage its ESG without a tech tool. She notes, “You could do all this planning if you’re operating on a single company level and suddenly all the prep work you did is no longer relevant because new guidance comes out.”
Service providers may stay up to date on the new guidance, which may be relevant for a huge suite of companies. However, on a single-company level, these changes may completely ruin a company’s processes.
Better definitions
Julianne states, “There’s a general issue with a lack of consensus around terms related to ESG, responsible investment and sustainable investing and each of these associated areas.” It is this lack of clarity that presents the biggest obstacle. For example, an ESG fund does not necessarily mean that it is an exclusion fund and that it cannot invest in any oil and gas companies. It could mean that it is an ESG integration fund, where companies can invest in an oil and gas company with a focus on ESG principles. Alternatively, it could be called an ESG fund which is also an exclusion fund. This means it is not allowed to invest in these industries. She notes, “It is hard for the end-investor to know how funds are being invested and what values trickle through.”
Bridges Spectrum of Capital
Undoubtedly, ESG is a complicated space, especially when it comes to labelling. Julianne often sites The Bridges Spectrum of Capital in her newsletter. In this spectrum, investment for pure financials is on one side of the rainbow. Philanthropy is on the other side. She explains, “Everyone sets in between with how they want to allocate their personal capital.” Now, a lot of what is going on in ESG is purely ESG integration, considering ESG as part of a company’s financial analysis of risks. However, some businesses might want to be sitting at different points on the rainbow.
Reporting metrics
Currently, there is a lot of inconsistency in how companies are reporting metrics. Consequently, much of Nossa Data’s focus, as a technology company, is purely on disclosure and metrics. For instance, three companies in the same industry may not report on the same set of metrics. As a result, it becomes much easier to hide information.
While metrics like deaths on sites may be a highly relevant piece of information, without consistent reporting, it is impossible to dive deeper into the findings. Julianne calls for better comparison between industries. However, the reality is that most companies are only just beginning to figure out regular cadences of disclosure.
It is easy to mislead retail consumers because they do not have the time to dive into these metrics. Julianne asserts that it is the role of the people who are in the industry and regulators to clean things up so that eventually it can work for a retail consumer.
The improvers
What makes ESG most successful is the large-scale impact of incremental changes. Julianne observes, “There are better ESG oil companies are there are worst ESG oil companies.” Oil will still be sold to some extent. That’s why it’s important that investors’ money goes to the better ones or even to an improver. Rockefeller ESG Improvers Score (REIS) is useful to access relevant, comparable data.
Julianne asks, “Could you have a more positive impact investing in the most sustainable oil company that is moving into renewables?” Alternatively, would an investor have a better impact on an oil company that is actively going on an improvement curve? By doubling down and committing to doing a better job, ‘improvers’ are making an enormous impact.
What should investors consider?
If a company’s governance is not in place, it is irrelevant what it is doing on the social and environmental side. When a company lacks “buy-in” from a senior part of its organisation, its teams cannot get enough participation. When leaders communicate their commitment to ESG, they can empower different departments to improve on their areas of focus. Without senior buy-in, companies may be setting themselves up for more disasters in the future. As a result, investors should look for the Chief Executive Officer’s public statement on ESG. They should also check if the board has an ESG committee in place.
Using AI
Nossa Data utilises AI from a deduplication perspective. While reporting requirements can be onerous, it uses AI to carry out topic matching between different areas of reporting. This helps its clients align frameworks, leveraging their existing work, instead of starting from nothing. This is Nossa Data’s real focus and why it continues to grow, developing its ESG reporting software and improving customer experience.
Conclusion
It’s an exciting time for Nossa Data as it expands. Founded by Julianne Flesher (CEO) and Irina Dumitrescu (CTO) in 2020, it has fine-tuned its product even further while working directly with hundreds of the world’s largest corporations, thanks to a direct partnership with The Workforce Disclosure Initiative (WDI) set up by the NGO, ShareAction.
Eliga Services’ Head of Operations, David Cowland states, “Reducing our Carbon Corporate Footprint is an important part of Eliga’s Climate Action Strategy. Nossa Data’s Seed Funding announcement highlights the growing need for third-party partners. These partnerships help companies stay up-to-date and do their part for the environment. We look forward to more industry insights from Julianne’s newsletter and the wider ESG community.'”