ESG stands for “Environmental, Social, Governance” and has been the de facto label in finance for investments that meet the goal of sustainability. Financial institutions, companies, governments, etc. have begun issuing and financing ESG-linked products. These products are financial instruments that are in direction of a sustainability goal. For example, a government or corporation can issue a bond to finance anything. Governments and corporations do this routinely as debt is often a cheaper form of financing than equity. Debt is used to finance projects, such as expanding a business, building a public transportation system, or just about anything else that the debt taker will later use to pay back the debtors. ESG-linked debt is used specifically to finance ESG-linked projects. Governments will issue green bonds to finance renewable energy projects like offshore wind, companies will issue green bonds to speed up the transition to clean energy or to finance the expansion of a sustainable branch of business. Green bonds are the most common form of sustainable finance, and the chief reason is that it is the easiest to evaluate from a data point of view. Green projects are very similar to non-green projects in that they have a timeline to success, the cash flows are predetermined, and it is easy to assess when a project is high risk or not. This breadth of data does not exist for the social element of projects. There is both a lack of understanding and a lack of analysis of the social risks and social impacts of a particular project.
https://thesfactor.co/ The S-Factor is a company that attempts to remedy this gap in impact investment. From their website, they “measure individual companies’ socio-economic, socio-cultural and socio-political impact on people, starting with its employees, and incorporating the systemic impact in the communities where it does business”. They have created a platform and model measuring multiple social impact criteria, focusing on sentiment, controversy, government, ethics, supply chain, and best practices. Similar to Sustainalytics, they generate an S-Factor Score and Rating, comparing companies across their sector, their geography, and their product offering.
The main stakeholders for this company are impact investors (including large financial institutions). The company’s product may be released to be utilized by individuals, much like Sustainalytics or Morningstar can be used, however it is definitely geared towards investors. The whole point of the company is to disrupt the current understanding of ESG investment, one that they believe is catered towards the “E” with a disregard for the “S”, leading to “impact washing” of investments.
Personally, I believe that this company is offering something extremely valuable for investors, the main question is “why should they care?”. The company’s pitch currently truly appeals to impact investors that really care about holistic impact, as the current impact investment landscape is currently largely focused on environmental sustainability. Changing the conversation around impact, to include other (social) factors is paramount to the long-term success of this company. Moreover, I am not sure if there is a legitimate financial value-add for financial institutions to look to other impact factors. This is not the case with environmental impact analysis (because of how similar those investment criteria are to traditional financial ones).