ESG Patents: A Major Hidden Value
ESG Patents: A Major Hidden Value – The Case for Quantifying ESG Initiatives as Intangible Assets and Increased Firm Valuation
by Kassie Killebrew
Abstract
The growing demand for financial reporting and accounting to be accompanied by climate disclosure as established by company policy has put ESG front and center in recent years. Often overlooked is the business opportunity at the intersection of company ESG policies, the expansion of Intellectual Property portfolios and the resulting increase in company valuation. We’ll explore the metrics behind investments into ESG and how they can produce higher company valuation resulting from an increased IP portfolio vs. longer-term ROI metrics around performance on GHG reduction, diversifying talent and suppliers, or the offset market. Systems-thinking is an innovation driver.
Introduction
In practical terms, ESG factors are practices that lead the business and investments. Its analysis can determine how the company positions itself adjacent to the effect on the planet and society in which it operates as holistic measures of performance. So, increasingly, the sustainability of the companies is through these three axes.
As ESG factors are increasingly recognized as critical determinants in the success or failure of corporations of every stripe. Investors, too, are paying more attention to ESG factors because incorporating them into investment decisions can help manage risk and generate more sustainable long-term returns. These intangible assets include a company’s reputation, intellectual property, and brand value – and many are directly related to, or affected by, mainstream ESG factors:
Environmental – climate change, pollution, water management, biodiversity
Social – human rights, labor relations, health and safety, community relations, diversity
Governance – board structure and accountability, executive pay, bribery, and corruption
Financial institutions frequently use ESG factors as well as indexes to measure the performance of the companies and, as a logical consequence, this will directly affect the evaluation of such companies in the market with respect to the assets and reputation of their brands[1]. In addition, consumers are starting to demand responsible attitudes and transparency from companies they interact with.
These indexes will bring several advantages to the companies, such as reputational benefits, further transparency, governance, diversity of investors, and the tendency to improve the valuation of companies in the long term.
ESG and Intellectual Property
The past decade has seen a rise in the filing of patents related to environmental goals, such as net-zero carbon emissions — particularly in the energy sector — driven by an emergent green economy and a flow of funds into environmental, social and governance (ESG) focused investments. While this is primarily occurring in the “E” of the ESG space by way of “green IP” or patents related to innovative technology in the renewables and climate sector, the “S” & “G” are overlooked opportunities to (1) patent technology improvements [utility patents] in the enhanced methods around capturing and managing ESG data within their operations including but not limited to material KPI’s and GHG emissions, water management, offsets and REC’s, internal and supplier diversity. Further yet but not as easily quantifiable within IP portfolio valuation, ESG and CSR reports and strategies are deeply specific to the nature of a firm’s industry and specifically how that organization operates within the sector. ESG frameworks span the totality of business operations from small firms to corporate goliaths. This leaves an enormous opportunity for trade secrets in how they modify and their SOPs to adjust for carbon accounting and disclosure. The early capex investments often become cost-neutral through NetZero efforts. Through incorporating and enhancing ESG IP, efforts could become cost positive.
The corporate world’s race to NetZero sets a new precedent for intellectual property particularly to patents and trade secrets. In the case of Exxon, with a great deal of shares owned by Blackrock, they have the war chest to capitalize new technologies and protect their Research and Development and enhance valuation by patenting their tech. Additionally, this creates a direct line of sight from capital investments in innovation and drives transparency. This is helpful both to the company as their valuation increases alongside the IP portfolio, and to existing or future shareholders in garnering confidence that the corporation is actively engaging on their ESG goals.
A Deeper Look into ESG Reporting
As these operative shifts become organizational baselines, multi-disciplinary approaches are taken to aggregate and analyze data for KPI’s and ESG metrics. This requires a committed cross-participation of C-Suite and mid-level management across all functions and stakeholders. Crafting sustainability reports, deciding what’s material, developing metrics, how and when they measure, aligning with new SEC requirements around climate disclosure, if developed internally, is especially capital intensive and extremely time-consuming work. As ESG policies touch on issues that range from water management, reducing carbon footprints, board accountability, executive pay, the frameworks are all-encompassing and intersect all functions of a company, inherently altering an organization’s operating procedures.
As such, ESG reports are living documents that reflect the emergence of innovative ways of thinking, accounting, communicating with consumers, setting new industry standards, and committing to policies that meet the triple bottom line. They are invaluable and intangible parts of brand identity and holds them accountable to their claims.
Green Tech, IP Rights and Additional Revenue
Without new technologies, the risks we are facing will not be tackled, and the collective goals will not be reached. Innovation in the field of "green" technology will therefore be pivotal, and IP rights will play a major role. IP rights can secure those investments in research and developments are amortized by commercializing technology, but they can also pose obstacles and limitations. It is therefore crucial to understand the influence and possibilities that "Green IP" can bring to bear.
"Green IP" will affect companies from all industries, sectors, and geographies. The consumer goods industry will have to deal with requirements to design their products in a way that they can be repaired and recycled. Financial institutions will want to offer (and perhaps must oversee) environmentally sustainable investments. Real estate companies will have to ensure high power efficiency and low waste in their buildings. The infrastructure industry as well as the transportation industry will have to find ways to cut pollution and substitute hazardous materials. And the technology sector will have to provide the basis for most of the technology – from network infrastructure to big data and AI.
Overview of Short-Term ROI on ESG Investments
Small and big firms can invest in intellectual property in a myriad of ways to [potentially] generate new lines of revenue and/or increase company valuation. Small firms can use trade secrets around reports [trade secrets] and data internal management systems [patents] to generate additional IP. They can also garner consumer loyalty by continuing to build their brand recognition as a trusted source of conscious consumerism. This could be incredibly beneficial for future capital raising as valuation projections would reflect the enhanced portfolio.
Larger firms can mimic this strategy but could go one step further if they choose to develop their ESG strategies and tech internally. A barrier to ESG investments today is the cost. The Big Four are a minimum investment of $100k on a 6-month contract to build ESG policy for corporations, and smaller boutique firms will run you about $40k to craft these reports for the same time frame. If those dollars were spent internally to develop an industry standard, additional lines of revenue could be created for corporations by licensing an accounting tech or software, neutralizing their initial investment, and creating an affordable option for firms with less purchasing power within the industry. Only large corporations have the spending power to do this.
Other examples of business use cases for enhanced ESG IP:
1. Patents: technology developed to measure GHG’s and companies KPI’s – AI as an extension of an individual’s creative processes within establishing key performance indicators.
2. Design Rights: packaging redesigned to ship goods more efficiently, decreased waste and logistics needs.
3. Trademarks: “Coca Cola” vs. “Coca Cola Green” examples of products moving into market that still point the consumer to the parent brand, but the new trademark identifies products that are sustainable by use of innovative packaging, or reduction in transport, reduced use of harmful additives, etc.
Investors, ESG and IP
ESG aims to establish an evaluation of companies’ social and environmental responsibilities, but in so doing, it is very useful in helping “socially responsible investors” make their choice as to where to invest. In addition, environmental and social factors are becoming increasingly important in determining the value of a company where estimates of the value of global ESG assets will exceed $53 trillion by 2025.[2]
Companies grow increasingly attractive to investors if they recognize the ESG factors relevant to their enterprises, invest in them as business opportunities and manage them well. Conversely, poorly managed companies that ignore ESG factors may be riskier investments. As the accompanying chart shows, one study found that over the past 30 years, intangible assets constituted an increasingly large component of companies’ market value.
Looking at the patent values of these patents, a different trend is seeable: here the ESG patent values rise compared to all patent values at a significantly higher level and remain at a higher value level - a contrasting picture than for patent filings. Assuming that disruptive inventions are represented in a high/increasing patent value, which leads to innovations rather than worthless inventions, this analysis confirms that ESG guidelines do indeed seem to be an innovation driver, at least as far as technical characteristics are considered.[3]
Conclusion
Organizations should look to ESG as an opportunity to enhance their business. They need to think bigger and beyond the initial outlays and reframe their budgets to reflect investment in innovation. View ESG as they would refer to any other line item: ESG is the cost of doing business, and it’s a long time coming. What needs to be fully realized is that it doesn’t have to be cost-negative. There are many mitigation strategies, however placing a loftier weight on the ESG and IP opportunities would allow for expansive and speedier returns. The advantage for investors is that they can map patents to decipher whether a company is making real efforts to invest in sustainable technology. The advantages for the organization, particularly through the intangible asset lens, are a myriad of ways to generate new lines of revenue, short-term ROI, increasing company valuation, becoming more greatly investable, and simultaneously offsetting costs and environmental and social damage. A case for businesses, and particularly corporations to create value by driving innovation as systems thinkers and enhancing the triple bottom line.
References
https://us.allianzgi.com/en-us/sustainability/sustainable-ideas/esg-is-going-mainstream
https://vds.issgovernance.com/vds/#/MjQwMQ==/
http://media.intracomgroup.de/InTraCoM_mostSustainableSectorsCompanies_Feb2020.pdf
http://media.intracomgroup.de/InTraCoMCorrelationPatval_and_Patcount_July2019_DOK.pdf
http://media.intracomgroup.de/Intangible_assets_Study_ANZ.pdf
http://media.intracomgroup.de/InTraCoM_mostSustainableSectorsCompanies_Feb2020.pdf
http://media.intracomgroup.de/InTraCoM_ESGJune2019.pdf
https://www.evidenceinvestor.com/wp-content/uploads/2021/11/Foundations-of-ESG-Investing-Part-1.pdf
https://ficpi.org/blog/sustainable-innovation-intersection-between-intellectual-property-and-esg
https://www.iptechblog.com/2022/03/the-use-of-blockchain-in-esg/
https://www.wipo.int/sme/en/value_ip_assets/
Cross, Frank B., and Roger LeRoy Miller. The Legal Environment of Business Text and Cases. Cengage Learning, 2018.
[1] https://www.environmentallawandpolicy.com/2021/05/exxon-mobil-corp-board-turnover-a-cautionary-esg-tale-or-recipe-for-success/
[2] https://www.iptechblog.com/2022/03/the-use-of-blockchain-in-esg/
[3] http://media.intracomgroup.de/InTraCoM_ESGJune2019.pdf