Effective data management is the key to minimising climate impact – and measuring progress.

The case for climate-focused finance has never been clearer. Business leaders are facing more pressure than ever before to step up their organisations’ green efforts and help protect the planet for future generations.

It is obvious that shifting the economy from fossil fuels to clean sources of energy requires a vast reallocation of capital, but there’s another pressure being felt. Leaders in every sector – including financial services – are increasingly realising that purpose and profitability are intertwined.

The market demands green action

As awareness around sustainability continues to grow, consumers are increasingly inspecting the environmental and social actions of the brands they spend their money on, with the intention to become more climate conscious in their choices. We’ve seen how businesses are responding to stakeholder and regulatory pressure by putting Environmental, Social and Governance (ESG) standards front and centre of their efforts when negotiating partnerships and supplier deals – with the EU requiring enterprises to regularly report on ESG activities. Furthermore, the EU’s Green Deal is mobilising €1 trillion in investments to support digital initiatives that marry sustainability efforts with economic growth in the coming decade, not least to mitigate against the impact of the Covid-19 pandemic.

In the post-COP climate, where less than 45% of city investors recognise ESG as a priority and the performance of the financial services industry trails government ambition with only 16% on track to reach net zero by 2050 (according to Microsoft UK research), there are a number of growing pressures pushing the industry to be more sustainable and considerate of climate impact.

Making ESG a boardroom priority

In order to accelerate climate action and boost the business value that ESG can create, businesses must now position sustainable finance as a boardroom priority with the same degree of reporting and focus as financial results and performance. There is a huge opportunity to utilise data and technology more effectively to make this a reality. Those companies that demonstrably follow through on their commitments will develop a competitive advantage. Research from Bank of America shows ESG investment strategies outperformed by 5 to 10 percentage points in Europe and the US.

Investors have also taken note. In 2020, the global value of ESG exchange-traded funds (ETFs) doubled to over $120 billion. Financial services companies, such as BNY Mellon, are launching data and analytics solutions specifically designed to help managers better customise investment portfolios to preferred ESG factors. 

The creation of an ESG taxonomy  

As allocators of capital, financial services companies – be they fintechs, retail banks or investment brokers – have a critical role in shaping a more sustainable, inclusive future. They are the gatekeepers between finance and the organisations successfully advancing on their ESG goals.

However, as the ESG market matures, the issue of measurement is proving to be a significant pain point. Unlike measuring and reporting financial performance, there is currently a lack of clear cross-sector standards for ESG reporting. Instead, ESG-related data often comes from self-disclosed annual sustainability or quarterly data vendor reports and rankings.

At present, there is no agreement on a global taxonomy for effective ESG measurement. Although the World Economic Forum and the International Business Council have taken on the cause of creating common metrics for ESG reporting, there are several other organisations and jurisdictions attempting to clarify minimum standards. The United Nations (UN)’s Sustainable Development Goals (SDGs), the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD), the EU Taxonomy Regulation and the Sustainability Accounting Standards Board (SASB) framework all focus on different aspects of creating a measurement standard.

With some jurisdictions – such as the UK – indicating that they intend to create their own taxonomies, it is imperative that this issue is addressed. In the current climate, where a mix of definitions, metrics and reporting standards exist with no central coherence, the principle is left ineffectual. 

While this concept seems like a simple move, the reality is that gaining a rich, reliable understanding of the impact an investment portfolio or insurance package has on the environment requires a rigorous and nuanced approach to data management. 

Data management: The key to every ESG journey

Each organisation will be embarking upon on its own journey with regards to recording, reporting and actioning ESG-related data. There is no set path to follow. Chief among concerns will be how data is captured and measured – not only to guide internal ESG efforts, but to ensure transparency with external stakeholders.

The key is to consider the ‘S’ and ‘G’ too, by capturing data, not only around sustainability, but the total impact of their efforts to behave as an ethical business and advance societal goals. There are solutions that can help organisations gain a clear picture on this.

Moving to the cloud is a fundamental step for being able to capture and store internal and external data – both structured and unstructured. Variables being measured might include direct and indirect carbon emissions; raw materials sourcing and waste management; or workplace pay equity and diversity.

Further, artificial intelligence (AI) and machine learning have important roles to play in automating data capture and analysis. This is why NatWest is working with its business customers to deploy AI tools – enabling them to better understand their carbon footprint, those of their partner networks, and create tailored action plans.

Opportunities for a greener future

Using data to confidently report ESG progress not only builds trust with key stakeholders, employees and investors, it opens businesses up to new opportunities. Indeed, shifting to becoming a data-driven organisation can create entirely new business models that drive revenue, while also decreasing CO2 emissions. By building upon these foundations, new investment opportunities will be created – designed to withstand the challenges of the decades ahead.

One such example is the Netherland’s Rabobank, which is using technology to nurture more sustainable farming practices, by creating a platform that lets farmers monitor, manage and offset their CO2 emissions using remote satellite sensing and AI algorithms.

Ultimately, investment in green transformation is imperative to the continued success of the industry. Not only does it make business sense in a more sustainability-conscious market, but it’s the right thing to do for our collective future – ensuring that along with economic growth, we continue to progress with tackling the critical environmental and social issues facing humanity.