This is an excerpt from Finextra’s report, 'The Future of ESGTech 2023'.

Although regulatory and governmental action towards sustainability has been taken with examples such as the EU taxonomy for sustainable activities and numerous net-zero pledges made in recent years, “differences in the concept of materiality and the classification of sustainability activities will complicate efforts to create global standards,” according to Moody’s ESG Themes for 2022. This trend is set to continue in 2023 despite all the steps taken across ESG disclosure in 2022.

It must be noted that for decades, sustainability and ESG disclosure was conducted on a voluntary basis, but as the International Sustainability Standards Board and European Commission increasingly impose standards, it is evident that a widely adopted initial framework will be established, with the emergence of national and regional taxonomies that ensure interoperability across all organisations.

Further to this, after tackling climate, new taxonomies are expected to cover a larger set of economic activities that are valued by a larger range of financial institutions. As explored by Moody’s: “Questions around interoperability and compatibility of national taxonomies will grow in importance for investors and regulators. Common language that is science-based and provides the required level of detail will be important to scale taxonomy-backed green and sustainable finance activities globally.”

Financial institutions are in the best position to contribute scaling these taxonomy-backed activities and contribute to change across ESG goals, and it could be argued that in 2023, they have a moral responsibility to do so. According to Dr. Katrin Gülden Le Maire, advisor and researcher at the Abraham Kuyper Center, explains that for this to be achieved, data and information is crucial.

“Companies should provide as much in-depth and transparent information concerning their climate disclosures, ethical investing, and financial inclusion services/products as possible. Many of them already adhere to and abide by standards set as such by the PRI [Principles for Responsible Investment]. This is laudable and should be further encouraged,” Dr Gülden Le Maire mentions.

However, to reach success, banks require comprehensive ESG strategies to ensure they are meeting the current standards and are preparing for those that are incoming. While consumers demand their financial providers ensure the way they conduct business is sustainable, stakeholders are also expecting their banks to have an awareness of whether their investment decisions will impact the environment.

Banks are expected to have this awareness, but for smaller fintech startups or SMEs, this can be problematic. HSBC’s Natalie Blyth says that “companies are at very different stages in their transition journeys – from having sophisticated plans in place, through to SMEs who may understand the need to transform but don’t know where to start. These firms have less knowledge, resources, and data than their larger counterparts.”

For this to work, this model requires supply chain transparency, and a need for information on how suppliers meet their own ESG goals. However, obtaining this information is not simple. According to Oxford Economics, only 56% can segment suppliers by risk level and category level quickly and easily. Further, only 47% regularly refresh risk mitigation plans to address potential disruptions.

Blyth continues to explain that technology is the key to resolving this. “Technology and partnerships are key to supporting them at scale to address critical pain points and develop the tools such as carbon calculators or ESG scoring that can help them navigate ESG disclosure and standards. Technology such as supply chain transparency platforms will also support embedded solutions for sustainable financing that require ESG target-setting, performance disclosure and certification.”

In addition to this, specific bodies that attempt to improve climate disclosures, such as the Task Force on Climate-related Financial Disclosures (TCFD), can be a great support. “The TCFD standard, promoted by the Financial Stability Board since 2015, urges entities to specify the resilience of their strategies to climate-related risks (physical and transitional) and opportunities."