Sustainability Data Redefined

Ex-PRI innovation lead Mikael Homanen explains how the Upright Project’s methodology for analysing company data can help quantify net impact through analysis of positive and negative factors.

Mikael Homanen, Head of Scientific Research, Innovation and Partnerships at impact data company the Upright Project, started his career in academia, working on ESG finance at the business schools of several prestigious universities, including Wharton, Chicago Booth and Bayes. “It was great to spend those years trying to understand what we didn’t know from an academic point of view,” he said.

When Homanen joined UN-supported Principles for Responsible Investment (PRI) in 2016, it was the first time he felt he could action some of the knowledge and insights from the academic research space to help investors in their progression on sustainability.

He spent eight years at PRI working on research, data software and reporting, driven by his passion to find scalable solutions to help market participants benefit from accessing impact-related information.

During his tenure, Homanen observed the challenges investors face when integrating sustainability in their investment processes. He also came across many ESG data companies, each making incremental improvements to the status quo, such as specific solutions for a new regulation or thematic area. However, most weren’t attempting revolutionary change.

The Upright Project was one of a few attempting to fundamentally change the way to examine companies’ ESG impact, according to Homanen. “I could see that this company is doing something big in the impact assessment space – it is building a new foundation for looking at company data,” he said.

Launched in 2017, the Finnish start-up’s mission is to serve companies and investors with data. “It uses data that’s already out there, much of it in the public realm, to evaluate companies or help understand investments better,” he explained.

A unique approach

The model has two main differentiators. The first is the way Upright looks at companies. For example, it doesn’t focus on ESG disclosure data nor what the company says it’s doing. Instead, it examines the company’s products and services. “It is a purely outside-in view of the company’s business model,” Homanen said.

To date, Upright is able to classify 150,000 products and services.

The second part of Upright’s methodology is its use of academia to evidence the impact of different products and services. The model incorporates more than 250 million academic papers and other sources, such as the World Health Organization.

“Importantly, these aren’t just the obvious research, such as the many papers showing the negative impact of greenhouse gases on the planet or tobacco on human health,” said Homanen. “Other product and services are more nuanced, with both positive and negative impacts.”

For example, much research has been published on the negative effects of social media platforms on mental health. However, there are positive effects as well, such as bringing communities together, providing joy and happiness, and helping people make new connections.

In addition, Upright doesn’t look at products individually, but connects them as they are in the economy. For example, a company that sells fertiliser enables another company to sell apples, which in turn enables another company to sell apple juice.

“These products are connected through the supply chain,” explained Homanen. “When thinking about impact, much happens downstream – for example, an airline is seen as the emitter, while the airport doesn’t receive the appropriate blame for enabling the airline.”

The positive and negative effects are embedded in Upright’s methodology. Each entity is allocated credit or blame, depending on the impact that they’re supporting. For example, consultancy services can be provided to both good and bad types of companies.

“The supply chain angle is important, as finally we have a full satellite image of a company,” he said.

Case study

To take one example, Upright has modelled 165 products and services of German multinational technology conglomerate Siemens, providing a granular view of its total sustainability impact. Across all product categories, Upright showcases the revenue percentage and product information, including lifecycle management software, engineering services, cardiac resynchronisation therapy devices and so on.

It provides an overview of all the negative and positive impacts for each product across many impact categories, such as physical diseases, human rights, greenhouse gas (GHG) emissions, and biodiversity. “It is giving us a complete view of the company’s overall impact,” said Homanen.

For each impact category, Upright clients can do a deep dive, for example identifying which of Siemens’ products are driving negative GHG impact. “The list, which is ordered based on the contribution to the company’s negative impact on GHG emissions, identifies low voltage switch gears as one of the bigger drivers of emissions,” he explained. “We can also look at which products contribute most positively to our lives, such as radiation therapy machines.”

According to Homanen, no matter what the data is used for – whether investment purposes, risk assessment, understanding whether the company is ready to meet future demand, or stewardship for change – these insights enable tangible, meaningful conversations with portfolio companies.

“It doesn’t need to be solely a high-level discussion about ambition, as we can ask more concrete questions, for example around future plans for products that are driving emissions,” he added. “Importantly, it is not just on the negative impact side; we can also give them credit for positive impacts.”

Good value

Many of Upright’s current clients are using its platform for disclosure. One of the biggest drivers is the ability to explain to investors the impact of a particular fund in more granular detail than EU Sustainable Finance Disclosure Regulation classifications can provide, for example. While regulation is often well intentioned, it doesn’t go far enough to meaningfully deliver fund transparency, according to Homanen.

There hasn’t been a cost-efficient way to provide deep levels of fund transparency, he said. “Upright has created a scalable way to do this, modelling more than 50,000 companies.”

Over the past seven years, the firm has developed a machine learning model to categorise products and services and connect the 250 million academic papers to discover causal statements. “The more scientific evidence of an impact, the more negative or positive the impact is going to be associated with that company,” Homanen explained.

The model is updated every quarter, and all investors and other clients receive a detailed summary of the latest changes in the methodology. Such changes could include inputting a million new academic papers, or it could be that Upright’s ability to understand the subtopics associated with physical diseases has become more granular due to increased internal expertise.

“My goal is to get academics on board,” said Homanen. “Academia hasn’t yet asked itself how we can automate showcasing what scientific consensus is with different use cases, so that we can better understand a company.”

Open access

Many new Upright clients are companies based in the EU looking to meet new requirements to disclose impact metrics under the Corporate Sustainability Reporting Directive.

“As more companies and investors need more data, Upright’s coverage increases fairly effortlessly because the information-gathering is automated,” explained Homanen. He believes that the coverage could easily reach 15 million companies, based on demand.

As a result of automation, it is possible to get the same benefits at the asset class level, according to Homanen. Upright has done this for thousands of funds, covering private equity, venture capital, company stocks, fixed income, and fund of funds.

“At the PRI, we always talked about different asset classes’ ESG data, each of which had their own challenges. With Upright’s universal methodology, we finally having the same data across all of these funds,” he said.

Homanen is currently assessing the value with investors. “My hypothesis is that this could help align a large institutional investor’s sustainability conversations internally because they can combine data across different funds. Then it is a conversation covering the whole impact of all its investments, instead of going asset class by asset class,” he explained.

To date, Upright has modelled the impact profile of 35,000 funds, which are currently only accessible for its client base. However, the plans are to make its entire fund coverage available during Q3 2024, i.e. including them in open access solutions.

“Everyone will have access to this information under the free-use policy. This is already the case for 10,000 company profiles, which are available on the Upright platform,” said Homanen.

In line with Upright’s mission is to increase access to impact data globally, he hopes the launch will enable a big leap forward in the ESG and sustainability space. “We believe that this will provide a significant boost to retail and institutional investors in understanding the impact of their holdings,” he added.

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