Is ESG the correct measure of social and environmental impact?
When assessing infrastructure projects, Silta wants to target outward impact instead of exercises in governance and internal compliance-driven procedures. But if not ESG, then what?
At Silta, we’re currently engaged deeply in developing our project and borrower assessment tools. This involves intense collaboration between our project specialists, legal specialists and development team. Our shared goal is to see Silta being able to leverage our technology (and some plain sensibility) to streamline access to finance for important smaller scale social and environmental projects.
When bringing such diverse disciplines together to build a borrower portal, we often need to slow down and coach each other on key aspects of our respective disciplines. Sometimes, that triggers questions that cause us to stop and reflect for a moment. We had such a moment the other week at Silta when a team member posed a seemingly innocent question:
“Hey, are we really sure that ESG is the correct measure of our targeted borrower’s social and environmental impact?”
As a couple of us started to open our mouths with a quick answer, all that came out was “uh…” followed by thoughtful silence. The penny dropped. The “uhs” and silence were followed by “oh!” The reason behind our hesitancy was the recognition that in Silta, what we really want to target is outward impact, not exercises in governance and internal compliance-driven procedures.
ESG. Environment, Social, Governance. Forbes identifies that the term ESG may have been first coined in 2005 in a study entitled “Who Cares Wins.” ESG builds upon the earlier concepts such as socially responsible investment (SRI), which is driven by ethical and moral criteria to screen a company’s investments and avoid those which are deemed to foster social ills. ESG investing, on the other hand, is based on the assumption that ESG factors have financial relevance. ESG therefore requires significant economic, legal and financial analysis across the three ESG pillars to rate a company’s management and compliance, human resource policies and practice, and the company’s environmental outputs and its climate change readiness. An entire industry has sprung up around ESG reporting with the ESG services and data market approaching $1 billion in 2021.
An entire industry has sprung up around ESG reporting with the ESG services and data market approaching $1 billion in 2021.
As the Silta team began structuring our ESG evaluation criteria, we were confronted with a harsh truth. The data we would gather and the assessment we would apply to a project would be very useful in assessing the quality of a project’s management team, governance system and environmental risk management system. However, those factors still do not directly deliver the key outcomes we hope to see from Silta borrowers — i.e. meaningful and measurable social and environmental outcomes. ESG analysis favours larger companies with deep resources to assign officers and other team members to each of the ESG pillars and deliver annual detailed reports. Smaller companies and startup innovators are likely to lack resources and internal skill sets capable of scoring highly on ESG analyses.
Smaller companies and startup innovators are likely to lack resources and internal skill sets capable of scoring highly on ESG analyses.
After our “oh” moment, the question turned to “If not ESG, then what?” As a team, we quickly agreed upon impactfulness as the true measure of the projects that Silta seeks to introduce to the crypto community.
The Silta team has grabbed some analytical criteria from current ESG best practices. But if we’re to truly innovate, we have to be willing to go off-piste and explore what’s out there. We are now formulating our approach to assessing impactfulness with measurable projects metrics and outcomes. Our goal is to develop a due diligence system which measures the potential impact of a project as a key factor in complementing a disciplined approach to examine other project fundamentals.
If we’re to truly innovate, we have to be willing to go off-piste and explore what’s out there.
At this point, though, we want to put forward to the community a couple questions:
- Are we correct in assuming that this generation of crypto investors and blockchain enthusiasts share our belief that DeFi should help us finance a better world?
- Which metric do you use in deciding what comprises “impact”?
Silta would love to hear your thoughts. Please drop us a line on our Telegram: t.me/SiltaCommunity
Disclaimer: This article is for informational purposes only and is not intended as any kind of investment advice. Read our full legal disclaimer here. For further information, email us at contact@silta.finance.
