Patrick Wood on how new technologies have always been critically important for capital markets
Patrick Wood Uribe from Util talks to Climate Action about how new technologies have always been critically important for capital markets and how data and information problems need to be solved before sustainable investing has the efficient market it deserves.
Patrick Wood Uribe from Util talks to Climate Action about how new technologies have always been critically important for capital markets and how data and information problems need to be solved before sustainable investing has the efficient market it deserves.
Why are new technologies in capital markets important for sustainability and climate change?
New technologies have always been critically important for capital markets: mostly, wherever there are liquid and efficient markets it's because technologies are helping it happen. Today, if we want to make informed decisions, there is simply too much data for us to handle unaided, and out of all that data, only a certain amount is informative, and without the help of technology it simply takes too long to find. This is true for a lot of different types of data, but it's especially important when it comes to sustainability and climate change because the information relates to so many domains (climate, people, infrastructure), the problems themselves apply to investments across industries, and the impact affects so many communities globally.
What are some examples of how new technologies help?
New technologies have always helped. A number of long-standing financial instruments are exactly that: instruments or tools that allow us to make more of the resources we have. A lot of this has been about market efficiency: faster pricing, or trade execution, for example.
The latest technologies like Natural Language Processing (NLP), and Artificial Intelligence more broadly, are helping us with even more difficult problems on a large scale. Util is not the only example of using machine learning, for instance, but our models allow us to understand, in an objective way, the impact of 45,000 companies on the UN SDGs. We process tens of millions of texts in ways that no human could manage without unconsciously applying any one of many biases. These kinds of approach help us get the best of both worlds: scale and impartiality we couldn't otherwise achieve, and high-quality data that allows us to exercise our human judgment.
What do you see as the future challenges for sustainable investment?
I would say there are two major challenges. The first is something we see emerging today: the quality of information not matching the need. Data on sustainability is already inconsistent, and investors are demanding deeper and better quality data in order to know if their investments are truly sustainable. Making sure sustainability is not a matter of opinion but of fact is a critical hurdle to overcome.
The second challenge is that there will always be more to do in order to invest sustainably. The idea of 'green' investment has gathered momentum, but sustainability isn't just about choosing 'green' companies. It's really about managing the constant trade-offs between positive and negative value creation. Almost everything in the world comes at some cost, and sustainability is about allowing growth in one domain without destroying others, and ultimately about creating more value in the world than we remove, for all stakeholders and resources. That can't be done without better factual data on the positive and negative impact on the world of companies, products, and activities.
ESG is getting a lot of attention and attracting a lot of investment. Doesn't that bring us closer to a sustainable future?
Yes, and no. Naturally, it is great to see the changes in investor preference over the past year especially, but actually, since there is so much inconsistency between products labelled as 'ESG' it is hard to say if that preference is really being enacted in the market. And beyond muddled labelling, there are still considerable greenwashing risks, all the more so when there is such overwhelming demand.
The combination of these things means that the market for sustainable investments, considered separately from the rest of the capital markets, is not as efficient: information is not evenly distributed or quickly transmitted, so we have an important data and information problem to solve before sustainable investing has the efficient market it deserves.
Patrick Wood spoke at the Sustainable Investment Forum Europe in April, which brought together asset owners and managers, ratings agencies, banks, UN and Government policymakers, investors, development banks, think tanks, and NGOs committed to driving forward the sustainable finance agenda. You can watch all sessions on demand for free here.
