Enabling the circular economy — a fintech perspective

During my weekend run, I was thinking about how financial services firms currently provide analytics and reporting to support the circular economy. The sustainable investing assets have skyrocketed to $17.1 trillion in 2020 (yes, with a T), and there seems to be no end in sight.

The market size of sustainable investing in the United States is now $17.1 trillion, up 42% since 2018.

While the assets have skyrocketed over the last few years, I am completely baffled by the significant amount of information asymmetry on companies creating these assets. These companies provide minimal structured information that is reportable and that can drive financial performance. The data that exists is also not standardized by any means and subject to a lot of interpretation and greenwashing.

I have been thinking about a framework to solve this asymmetry problem, and it hinges on three things

1. Sustainability — This is what most companies think about when referencing sustainability reporting. It has also been referenced as ESG (Environmental, Social, and Governance) reporting by many asset management and investment firms. Several analytics firms focus on this and provide proprietary scores and ratings either as a risk factor or an opportunity identification. In addition, there is a proliferation of reporting guidelines on which companies base their reporting structure.
2. Traceability — The second critical area is focused on the provenance of the goods and materials sourced in the supply chain. This information is hard to source, and the global supply chain is highly complex. But without this, it will be impossible to verify and validate self-reported data by the companies.
3. Concordance — The third area is information about the company in multiple databases, registries, and online sources. It exists in different formats, structured and unstructured, as well. A dynamic and flexible concordance process must be set up as new snippets of information are identified about the company.

To enable the circular economy, all three of these have to be done; else the risk identification and opportunity assessment of the company will always fall short. This framework concept is a work in progress, and feedback is appreciated.

There are a lot of new technologies that can start to solve this asymmetry problem in creative ways, and it can have a powerful impact to fuel and enable the circular economy. I am looking forward to seeing how this area grows over the next few years.