Seeing the Invisible - Why Insights from Satellites Matter for Sustainable Investing

Oct 4, 2024

4 min read

A tension in sustainable finance exists – it’s a trade-off between maximising shareholder returns versus fulfilling a sustainable, ethical and responsible business transition. That pressure can tempt those in sustainable finance to avoid confronting new, mid-term ESG challenges - protecting financial performance against the original theory of change strategy.

That strategy aimed at value creation, inspired by the initial investment thesis
May move towards to green hushing as new damaging findings emerge, compromising a fraction of that expected performance.

As responsible investing and ESG-aligned value extraction gains momentum, earth observation and geoinformation insights provide both transparency and the ability to accurately and independently quantify positive (and sometimes negative) impacts.

These technologies can transform how companies and investors understand and address sustainability, turning perceived risks into opportunities for value creation. But mid-term, maybe the same companies and investors want these technologies to disappear – particularly when they find something that disrupts the initial strategy and has the potential to diminish the overall value of the undertaking.

Conflict in Fiduciary Duty: Profits vs. Sustainability

At the core of fiduciary duty is the obligation of directors and investors to act in the best interest of shareholders, often interpreted as prioritising financial returns over environmental and social good.

This can create a conflict when sustainable finance pledges and ESG considerations come head-to-head. While integrating ESG into business practices is increasingly seen as essential for long-term value creation, it sometimes challenges the traditional focus on financial returns, as viewed through a quarter-to-quarter time horizon[1],[2].

Consider a scenario where an investor - following a commitment to sustainable finance and board approved ESG strategy and transition - discovers through earth observation data that their portfolio company is responsible for previously unidentified environmental harms.

Maybe these harms are unable to be seen by the human eye - such as methane leaks.

While this presents an opportunity to further align with sustainable practices in its theory of change and value creation, it also introduces unquantified costs and risk.

In many cases, business leaders - including investors sitting in new board positions - may choose to downplay these new risks, sticking to their original plans to avoid disrupting shareholder value[3].

Earth Observation: A New Transparency

Earth observation and geoinformation technologies provide a critical opportunity to bring unprecedented independence and transparency to the impact of business operations.

Advanced analytics, within the constraints of an inherent and quantifiable uncertainty, makes it possible to detect and quantify environmental changes that are not visible to the human eye.

This capability is crucial for understanding both the physical risks posed by climate change and the negative impacts that businesses may have on the environment [4],[5],[6] - i.e. transparency around double materiality.

Take an example where satellite data reveals methane leaks that were not previously accounted for:

This insight might be reasonably simple to solve but could also be tricky and require a re-evaluation of a company’s ESG strategy and transition plan.
The challenge really lies in ensuring that these insights lead to actionable outcomes rather than being side-lined in favour of maintaining short-term profitability [7].

We can sit and hope that the gap here will be fixed with responsible business leadership, but experience says it’s probably a blend of best practice and compliance.

Some company executives will take on the additional cost and embrace the additional risk and building toward a hiccup-free payday;
Whereas an increased disclosure requirement and mandatory reporting obligation is more likely to trap a greater number of companies into enhanced ESG related transitions and outcomes.

Sustainable Finance: Fixing Problems with Double Materiality

Sustainable finance aims to address societal and environmental issues while still generating returns for investors. By focusing on double materiality, sustainable finance recognises that long-term value creation depends on understanding and managing both financial and non-financial risks. This involves using sustainability as a lever for value extraction, not just through traditional means like cost reduction or market expansion, but by enhancing ESG factors [8],[9],[10].

The role of geoinformation in this context is to provide the evidence needed to support sustainable finance strategies, and once invested – their operational strategies.

Accurately quantifying environmental impacts, these technologies can help investors and companies understand where value is being created or destroyed.
Both as shorter-term investment-horizons, and longer-term transition plan implementation.
This level of detail is crucial for making informed decisions that align with both fiduciary duty and sustainability goals.

Integration: Geoinformation into Sustainable Finance

To effectively navigate the tension between fiduciary duty and sustainability, investors and companies have an opportunity to embrace the transparency offered by earth observation technologies.

Ensuring all relevant ESG factors are considered, even those that emerge after the initial investment.
Supporting ethical business practice and alignment with accountability for impacts on people and the planet.

Earth observation and geoinformation technologies are critical components of a future where sustainable finance can genuinely deliver on its promises and independently evidence these.

With clarity around material impacts of business operations, these technologies empower companies to act responsibly and create real, measurable value – both for extraction in financial terms, and in longitudinal, behaviour-driven value as a legacy of sustainability-focussed directors.

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First published 4th October 2024 by UK Sustainable Investment and Finance Association (UKSIF) - https://uksif.org/seeing-the-invisible-why-insights-from-satellites-matter-for-sustainable-investing/

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[1] The Trouble with Tibble: Environmental, Social, and Governance (ESG) and Fiduciary Duty | The University of Chicago Business Law Review (uchicago.edu ) https://businesslawreview.uchicago.edu/online-archive/trouble-tibble-environmental-social-and-governance-esg-and-fiduciary-duty

[2] DOL Rule Clarifies that ESG Analysis is Consistent with Fiduciary Duty. Will it Preempt State Anti-ESG Laws? - Climate Law Blog (columbia.edu )

https://blogs.law.columbia.edu/climatechange/2022/11/23/dol-rule-clarifies-that-esg-analysis-is-consistent-with-fiduciary-duty-will-it-preempt-state-anti-esg-laws/

[3] Reconciling Fiduciary Duty and Social Conscience | Stanford Law Review

https://www.stanfordlawreview.org/print/article/reconciling-fiduciary-duty-and-social-conscience/

[4] Geographies | Free Full-Text | Geovisualization: Current Trends, Challenges, and Applications (mdpi.com )

https://www.mdpi.com/2673-7086/3/4/43

[5] Challenges and Limitations of Geospatial Data and Analyses in the Context of COVID-19 | SpringerLink

https://link.springer.com/chapter/10.1007/978-3-030-72808-3_8