Despite the absence of global regulatory harmonisation, ESG standards are becoming a central feature of public discourse, whether via supranational organisations such as the EU or through social and environmental activists with international reach such as Extinction Rebellion. However, there is currently no common definition of what makes a ‘sustainable’ company or what constitutes good ESG practice, which in turn gives rise to problems when measuring and reporting ESG.
A new paper from Capco, ‘ESG in financial services – today and in the future’, explores the ESG challenges within financial services and examines the technologies that could help address them. It considers the new types and sources of data that are emerging in the real economy, and looks at how the FS industry can integrate them within products and services to generate more coherent ESG information and drive better decision-making:
- Monitoring sentiment: AI-driven sentiment analysis could be key for tackling the shortcomings around ESG measurement, and by extension enhance the public perception if such metrics. It can be used to access the unstructured data which makes up around 80 percent of the world’s data, opening up new opportunities to investigate sentiment towards companies via previously unavailable information.
- Network Theory – understanding ESG links: Information networks can be utilised to help understand the ESG profile of a company through better information gathering. Similar to sentiment analysis, network theory principles can navigate through vast networks to compile true ESG profiles. Researchers can investigate relevant connections, such as companies’ supply chains or business dealings, to gain insights into how companies behave today and in the past – and the likelihood of them behaving unethically in the future.
- Combining diverse technologies: By using technologies drawn from diverse industries it is possible to benefit society and make widescale ESG reporting possible. Firms could, for example, combine satellite imagery, AI sentiment analysis and drones to measure the impact of their operations on the environment in real-time.
- Tokenisation – ratifying ethical supply chains: To truly create a standardised and coherent ESG picture across markets requires a way to share data, in real-time, across industries. One potential technology that could help combat this issue is tokenisation, which enables the creation of a real-time and verifiable shared database of assets and attributes a secure code or identifier to them. Tokenisation’s founding principles are centred around trust and security, and this makes it a prime candidate to help solve some of the issues around ESG measurement.
Charles Sincock, Managing Principal and ESG lead at Capco, comments:
“The lack of consistency in approaches to ESG is a real worry for the investment market. There needs to be far greater transparency within ESG data and around ESG scoring to enable financial institutions to be certain that they are investing in a truly sustainable cause. Greater transparency comes through better data collection and more reliable data sources.
Alongside increased transparency, there needs to be a supported, recognized framework which is sponsored by the industry and regulators – the International Organization for Standardization (ISO) could be a powerful force in providing more clarity to such frameworks.. For financial companies, this would be valuable for all elements of the finance chain, as they would be able to see how well they are performing and also how others are performing.”
“The technologies we highlight in our paper can be combined to gain a greater understanding of each organisation’s operating landscape. By better understanding networks such as supply chains, energy usage and employee habits, targeted interventions in response to new information or regulation will be possible – giving businesses the opportunity to approach ESG in a flexible and agile fashion.”
Capco is a global management and technology consultancy headquartered in London