Oliver Platt
Head of Client Solutions
Climate change awareness and conscious consumerism are on the rise in the post-pandemic era. These have made industry stakeholders and policymakers realise that it’s important for businesses to prioritise ESG practices.
The signing of the Glasgow Climate Pact and agreeing on the Paris Rulebook at the COP26 summit further signifies a global commitment toward a carbon-neutral future.
As sustainability becomes the focus of the global economy, financial institutions (FIs) have joined the phenomenon. They are announcing a wave of initiatives, such as:
- Increasing commitment by institutions is placed on net-zero pledges.
- Phasing and leveraging strategies of zero thermal coal exposures.
- Incorporating sustainable business practices into their business strategy.
- Committing to disclosures around climate-related risks and opportunities.
Within just 18 months, the largest 30 lenders by assets in the U.S., Canada, and Europe have all signed up to the industry-led, UN-convened Net-Zero Banking Alliance. These net-zero pledges significantly affect FIs’ lending and investment portfolios. They require FIs to track and report to internal and external stakeholders the greenhouse gas emissions linked to their lending and investment portfolios. An effective ESG data platform can streamline this tracking and reporting process, ensuring accuracy and transparency.
FIs also need to optimise their lending and investment portfolios to deliver long-term sustainable investment returns for clients. They must roll out products and services that comply with the ESG criteria. Leveraging an advanced ESG data platform allows FIs to effectively integrate ESG criteria into their offerings, enhancing their commitment to sustainability.
The ESG Data Disconnect
At the core of these sustainability initiatives, financial institutions have to deal with the ESG data challenges. Unlike financial data, ESG data currently does not have generally accepted principles and limited accessibility.
The inconsistency of ESG data further exacerbates the ability to verify and validate the ESG metrics that enterprises report. Several ESG data platforms, ESG startups, and consortiums have stepped in to fill the ESG data gap.
ESG data comes in various forms. FIs potentially need to collect hundreds of datasets from internal and external sources in different formats and data types. Moreover, different reporting frameworks lack standardisation for companies to capture, track, and disclose ESG-related information.
The fragmented reporting landscape, lack of obligation to report ESG data, and self-reporting procedures open up the possibility of ‘green-washing’—a marketing spin involving unsubstantiated claims about environmentally friendly practices.
In addition, ESG data about enterprise behaviour is in constant flux. Even though regulation is evolving rapidly, for many organisations, even compliant ESG reporting and disclosure may not be sufficient to meet sustainability imperatives.
Over-reliance on historical information and the lack of standardised data have forced FIs to look elsewhere in search of robust real-time data sets. Real-time data sources that include negative press articles, enforcement actions by regulators, product recalls, social media trends, etc., allow financial institutions to make more informed and sustainable investment and asset management decisions. An advanced ESG data platform can help FIs aggregate and analyse these real-time data sources, providing a comprehensive view of their ESG performance.
Finally, accessing and analysing the carbon footprint of the entire value chain in which the firm operates makes ESG data a Big Data problem. Utilising a sophisticated ESG data platform is essential for managing this complexity and ensuring accurate, actionable insights.
A Hybrid Approach to Accessing Quality ESG Data
In search of accessing transparent and reliable ESG data, FIs have undertaken a hybrid approach to ensure efficient collection, analysis, and reporting of ESG data. On the one hand, global FIs have strengthened their in-house capabilities. They’ve done so by developing state-of-the-art analytics solutions and hiring leaders to drive enterprise-wide sustainability initiatives.
On the other hand, FIs have also collaborated extensively with ESG data providers, technology service providers, and consulting and advisory firms to accelerate their ESG journey. Some of the large FIs have also invested in and acquired ESG data platforms to complement their in-house ESG product development programs. An ESG data platform plays a crucial role in ensuring the accuracy and reliability of the collected data, aiding in comprehensive analysis and transparent reporting.
Financial Institutions Collaborate with ESG Data Partners to Drive Sustainability Themes
Financial institutions and their ESG data partners.
HSBC Initiates ESG Data Partnerships
In the UK, HSBC led one of the biggest disruptions in the ESG industry. Their asset management arm first collaborated with climate change advisory firm Pollination in 2020. Then, the following year, it took a minority stake in Radiant ESG, a US-based ESG and diversity and inclusion-focused consulting firm.
With Pollination, HSBC aimed to create an asset management venture focused on “natural capital.” It sought to put a value on resources, such as water, soil, and air to help protect the environment.
Along with Deutsche Bank and Swiss Re, HSBC also announced their support for ESG Book. It’s a new ESG data platform with an ambition to ‘disrupt’ the market with a free “public good” service for companies and investors. This ESG data platform aims to provide transparent, reliable, and accessible ESG data to facilitate informed decision-making and drive sustainable investments.
ESG Partnerships in the US
In the US, in September 2020, Citi announced a partnership with Truvalue Labs, a pioneer in AI-driven ESG data, to accelerate its ESG research initiatives, analyse company ESG behaviour at scale, and monitor public company performance against sustainability criteria by leveraging Truvalue Labs’ data.
In November 2020, another US investment bank, JPMorgan, partnered with ESG data science specialist RepRisk to incorporate ESG risk metrics within its in-house data platform. The data was available via JP Morgan’s DataQuery platform to clients across its trading and securities services businesses with access to ESG risk data from over 150,000 companies. In Nov 2020, Germany-based Deutsche Börse acquired 80% of ISS, a leading ESG data and analytics provider.
Increased Regulatory Scrutiny
2021 saw a flurry of activities as regulations tightened and financial institutions came under increased scrutiny from watchdogs and consumers alike.
In March, BNP Paribas announced an alliance with sustainability data provider Clarity AI. The move facilitated users of the Manaos platform, BNP Paribas’ fintech subsidiary, with access to Clarity AI’s library of sustainability data. Manaos also partnered with Util and MoOdy’s V.E. to leverage Util’s machine learning models and utilise V.E. ’s data scores and assessments. State Street teamed up with S&P Global Trucost to allow the bank to overlay Trucost’s data intelligence on the risks and opportunities of climate change.
BlackRock entered into an agreement with Baringa Partners to acquire and integrate Baringa’s industry-leading Climate Change Scenario Model into BlackRock’s Aladdin Climate technology.
Acquisitions of ESG Fintech Firms
JPMorgan wasn’t far off from the limelight as well. It announced the acquisition of OpenInvest, a financial technology company that helps financial professionals customise and report on values-based investments.
Blackstone acquired Sphera, an environmental, social, and governance (ESG) software, data, and consulting services provider, from private equity firm Genstar Capital in a deal valued at roughly $1.4B.
In 2022, Goldman Sachs and Santander were quick to grab headlines. Goldman Sachs invested in GridPoint, a leader in building energy management and optimisation technology that decarbonises commercial buildings and drives grid modernisation. Meanwhile, Santander acquired 80% of ESG consultancy, WayCarbon.
U.S. Bank partnered with Sustainalytics, a leading global provider of ESG research and ratings, to offer ESG data solutions to U.S. Bank Global Fund Services clients.
In February 2022, JPMorgan Asset Management partnered with a third-party forensic data provider to calculate supply-chain risk to its investments. The forensic data provider helped JPMorgan examine soil samples.
As a result, it was able to determine if cotton used by clothing companies came from blacklisted countries.
A Data-driven Outlook for ESG Initiatives
Sustainable practices have gained a lot of traction over the past few years as ESG has become the priority across every industry. The emergence of the ESGTech ecosystem in this space has led to the development of new technologies to tackle the ESG data challenges.
From utilising real-time data by leveraging AI and machine learning capabilities to implementing blockchain technology, FIs have taken proactive steps to create a carbon-neutral future.
Embed ESG Data in Sustainability Initiatives with NayaOne
NayaOne offers an ESG Marketplace with pre-vetted ClimateTech and ESG Data providers for financial institutions to quickly discover and onboard for innovation projects. It also offers an integrated Innovation Platform and Synthetic ESG datasets to aid rapid experimentation, evaluation benchmarking, and launch of sustainability propositions to customers.
