SustainTech - how emerging technologies can help meet the demand for transparency and trust in ESG investments to meet United Nations Sustainable Development Goals (SDG)

1. Faculty of Business Magazine JUN 2021
FinTech
SustainTech – Building Digital Trust in ESG Investments through Technology
Mr Lapman Lee
Professor of Practice (FinTech and Innovation)
School of Accounting and Finance
New technologies, such as artificial intelligence (AI) and robotic process automation, blockchain/
distributed ledger technologies, data analytics, and the Internet of Things (IoT; i.e., the
integration of sensory and wireless technology into objects, giving them the ability to transmit
data about themselves, their condition, and their environment), can be leveraged to enrich the
breadth, coverage, and depth of environmental, social, and governance (ESG) due diligence and
ESG ratings, and thus build much-needed digital trust.
At the national government level, APAC’s largest economies – China, India, Japan, and Korea –
have either reaffirmed their previous commitment to carbon neutrality and carbon emission
reductions or shared more ambitious goals at the 2021 Summit for Climate Change held on 22–
23 April.
At the individual level, as a consumer, employee, or investor, what can we do to help fight
climate change and significantly contribute to the 17 Sustainable Development Goals (SDGs)
proposed by the United Nations?

2. Vote for ESG with Your Wallet
Because the annual financing gap to achieve the SDGs by 2030 is estimated at US$2.5 trillion,
individual and institutional investors can “vote with their wallet” to provide capital to companies
(listed and private) to carry out initiatives and projects that are in line with their ESG
expectations.
The ESG Data Challenge
With the myriad of ESG-themed debt and equity financial products, you can (1) rely on a
company’s self-reported ESG performance, which puts you at risk of greenwashing (the
company may create the misleading impression that its products, services, and policies are
environmentally friendly, which may not reflect reality); (2) make your investment decisions
based on a company’s ESG rating by a third-party provider, in which the breadth and depth of
the methodology may vary between providers; or (3) use a combination of the two. Typically, a
company’s ESG rating is based on a combination of insights generated from meetings with the
company and desktop analysis of its industry and peers, enriched with data from external data
providers.
However, supply chains are becoming more complex, global, and dynamic. A company can be
exposed to ESG risks without the management’s knowledge via its Tier 1 suppliers (companies
that directly supply goods and services) and Tier 2 suppliers (suppliers who supply the Tier 1
suppliers). This poses a challenge for ESG ratings as the rating agencies do not necessarily
have timely access to relevant primary and dynamic data to conduct enhanced due diligence to
achieve the much-needed transparency and visibility in the end-to-end supply chain, from raw
material sourcing processes and suppliers to the health and safety of employees and their
human rights.
You may automatically assume that a company that produces electric vehicles has a positive
impact on the environment because 1) electric vehicles produce no carbon emissions, and 2) the
electricity used is environmentally friendly if it is generated from renewable energy sources.
However, further ESG due diligence is warranted to understand the company’s manufacturing
processes (energy efficiency, pollution, waste management, and water usage) and people’s
labour conditions. In this example, the ESG due diligence assessment of lithium-ion battery
manufacturers and suppliers of raw materials, such as lithium and cobalt, may prove useful as
the countries that supply the raw materials may not have the same ESG standards as the electric
vehicle company.

3. SustainTech Framework
The SustainTech framework presented below illustrates how emerging technologies can help
build digital trust in ESG investments in the capture, conversion, creation, and cultivation phases
of the process.
Source: SustainTech Framework by Lapman Lee
ESG Digital Trust
Here, digital trust is defined as the degree of trust in the reliability and robustness of the primary
and secondary data used to support ESG ratings that leverage technology and ESG due
diligence.
1. ESG rating of the issuer or of the debt or equity instruments issued
2. Supply chain due diligence
3. Investment due diligence
i. Use of Proceeds: Is the capital invested in the projects and initiatives for which it
was intended?
ii. Proof of Impact: How do you demonstrate the concrete impact of your
investment?
In my opinion, building ESG digital trust is a prerequisite to drive capital from individual and
institutional investors to companies and projects to meet the UN SDGs by 2030.
Technology plays a key role in providing dynamic and easy-to-use data to make informed ESG
investment decisions, monitor ESG performance, and withdraw investments if ESG performance
declines, allowing us to truly vote with our wallet.