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By Subramanian Kuppuswami
Sustainability is now a top priority for financial institutions and is fast becoming a part of their corporate strategy, demanding the attention of CEOs and boards. In response to the increasing demand for sustainability and environmental, social and governance (ESG) action from various stakeholders, financial institutions are laying down a corporate purpose and spelling out its role in decision-making.
The Paris Agreement stipulates that nations make finance flows consistent with a pathway toward low greenhouse gas emissions and climate-resilient development. Consequently, the onus is on financial institutions to enable a sustainable transition to a greener economy by incorporating sustainability goals into their business strategies. In fact, the industry has already made a start; all large financial institutions have committed to achieve net-zero emissions and decarbonize their finance portfolios through transparent reporting of financed emissions.
The climate finance approach plays a critical role in slowing the impacts of climate change and achieve the target of limiting global warming to 1.5⁰C compared to pre-industrial levels. Even though the climate finance approach has steeply grown over the years, we are still well short of the $100 billion target by 2020, which was the commitment made over a decade ago. This presents financial institutions with a huge role to play with opportunities for growth.
Embracing Sustainability: From Theory to Action
The move toward sustainable or climate finance is gaining momentum; 168 global investors and financial institutions with US$17 trillion in assets have joined the Carbon Disclosure Project’s (CDP) 2021 campaign to urge some of the world’s highest impact companies to disclose environmental data2. This level of transparency and standardization will mitigate doubt that ESG investing is just a marketing ploy.
Transitioning to sustainable finance and investments, however, mandates a comprehensive and holistic approach to define an ESG strategy and integrate ESG factors into research and decision-making. This will require a transformation of the entire business ecosystem of financial institutions (see Figure 1).
Tougher regulations are paving the way for compulsory and comprehensive climate disclosures from businesses. Financial institutions must prepare for the impending move from the existing voluntary alignment with sustainability goals, which underscores the critical need for embracing ESG integration. With purpose-led, ESG-linked companies showing better performance and greater resilience in the ongoing pandemic situation, financial institutions have started realigning their portfolios and augmenting decision-making criteria with deeper ESG data and insights.
While ESG data is abundantly available, financial institutions struggle to effectively integrate it into financing models and investment decisions given non-standardized disclosures and lack of transparency into material considerations that impact ESG scores. Data providers use proprietary methods to interpret non-standardized and siloed data such as third-party data and corporate disclosures comprising raw ESG data. As a result, financial institutions lack visibility into the ESG factors that impact finance and investment decisions. Furthermore, consuming raw ESG data is an expensive and resource-intensive process with sourcing, standardizing, weighing, and analyzing innumerable data points requiring months of effort from a team of ESG and data analysts to achieve results.
The Way Forward
For financial institutions, the ESG integration journey will involve massive investments on data and technology. The financial services industry is calling for solutions that facilitate transparent ESG scoring, particularly those that are flexible and adaptable to evolving stakeholder requirements. A solution that leverages cognitive technologies to offer the capability to mine raw ESG disclosures and reconcile data ratings from major ESG data providers — as well as align their finance and investments with various industry frameworks — would be a godsend for financial institutions.3
Given the Paris Agreement prescribes directing funds toward sustainable development activities, driving sustainable finance and investing has become a critical imperative for financial institutions. To accomplish this, the first step is to implement a solution that helps integrate ESG considerations into business strategies, allowing financial institutions to meet the sustainable investment and investment mandates, and facilitating compliance with evolving regulatory reporting requirements. Financial institutions that act quickly will steal a march over the competition.
Subramanian Kuppuswami (Subi) heads the Sustainable Banking and Finance strategic initiative within TCS’ Banking, Financial Services and Insurance (BFSI) business unit. He has 24 years of industry experience and has played leadership roles in global delivery, relationship management, P&L management and strategy, pre-sales and solutions in the BFSI sector. Subi holds a Bachelor’s degree in Electrical and Electronics Engineering from the PSG Institute of Technology, Coimbatore, India.