Long reads

Sustainable Finance Live 2022: ESG = existential, seismic, global

Finextra Research

Finextra Research

Writer, Finextra

Enabling positive change through innovation and collaboration, Sustainable Finance Live returned for its fifth edition - and second in person event - at Events@no6 in London on 29th November 2022.

Richard Peers, sustainable finance visionary, contributing editor at Finextra and founder of Responsible Risk took to the stage to lead a programme of content, workshops, and experiments designed to create actionable ESG strategies and build the ecosystem of partnerships, which will turn strategy into reality.

A week from the event, here’s an overview of the Conference, the Unconference, and the Hackathon which saw over 100 attendees lean in, lean back, and learn by doing during the interactive parts of the day. Leaders in the sustainable finance industry discussed the problem statements and solutions that are defining the sector today.

The main themes of the conference were data, risk, and financial instruments, and Peers explored risk management through the lens of a self-driving car which can use its technology and sensors to move into either the fast or slow lane to avoid an upcoming crash that we cannot yet see.

He said: “The finance industry is still looking in the rear-view mirror, basing our risk decisions based on smaller historical analysis, which still of course has huge purpose. What we want to talk about is how can we actually bring all of the new dynamics in play, so that we can see the slow-motion car crash of climate change, biodiversity loss. We can think about what that means to our portfolios, and we can actually make the appropriate decisions.”

Is sustainable finance sustainable?

Considering decarbonisation, while many companies are monitoring both their carbon emissions and energy usage to meet ESG goals, greenwashing continues to be and greenhushing has become more prevalent in the sector. In his keynote presentation, Lord Christopher Holmes spoke about how the financial industry seeks to resolve gaps in ESG data and combat greenwashing in the sector.

Holmes opened by connecting back to Peers’ earlier metaphor: “We are not looking in the rear-view mirror, we have been walking backwards into the future, looking at the rubble and the wreckage of the past. We are nowhere near enough ability to face down the future, to influence and to put in place what's required not just for us, but for hundreds and thousands of years to come. Let's ensure that we turn a full 180 and face the future.”

Lord Holmes said that he is most excited about data collected by satellites and sensors, which can track the supply chain of factories and proof of concept through blockchain technology. He argued that transparency and ability to analyse data in real time can play a critical role in sustainable finance.

He continued to say that technology cannot be effective if we continue to have gaps in data: “We are looking too often at the aggregation of data, which is not good enough, is not up to date enough. As we have aggregated it potentially in our mind, we hire it to a level that does not necessarily take you anywhere. We have got to be able to go back to those initial data sources, touch them, understand them, analyse them, and be as rigorous with all the data in this space as we would with all of the data in any decisions that we are making.”

Moving on to innovative legislation, Holmes explained that The Electronic Trade Documents Bill could have a significant amount of ESG impact, calling it a “transformational bill” that can cut the transfer of trade documents from seven to ten days to travel down to twenty seconds. Holmes also presents the Financial Services and Markets Bill as an opportunity to change financial services for the better.

Holmes concluded with an emphasis on every aspect of ESG: “There is always a heavier focus on ‘E’ - environmental, but the truth is that each is as essential as the other, each interacts with the others. We cannot just leave the ‘G’ to the lawyers we cannot leave ‘E’ to the environmentalists. Ultimately to get this right, I think we should think of ESG as ‘E’ – existential, ‘S’ - seismic, and ‘G’ – global.”

Can open finance, open source and APIs resolve the ESG information gap?

Peers then passed the mic to Martina Macpherson, head of ESG product management, Six Group, who moderated a session on whether open finance, open source and APIs can resolve the ESG information gap, picking up on the points made by Lord Holmes around open finance and data.

The panel, which included Mark Akerman, chief technology officer, Tandem Bank; James Lockhart-Smith, VP, head of markets, Maplecroft; and David Patterson, head of conservation intelligence, WWF.

This session focused on the benefits of utilising APIs for the disclosure of ESG data and how AI/ML, NLP and LIDAR can be used to extract new data, but before diving deep into these subjects, Macpherson set the scene and explored ESG data analytics assessments across the investment value chain and the different types of information that can be sourced from providers, aggregators, and distributors.

While regulation is mandating more transparency across the investment banking and capital markets industry, including the Corporate Sustainability Reporting Directive that will come into force in 2024, “information will need to be standardised, harmonised and then normalised into relevant channels so that relevant decision makers can transparently disclose information through regulations like the SFDR and SDR,” she said.

Macpherson continued to say that “one size does not fit all when it comes to methodologies” and a challenge that has permeated this space is the shift from an “alphabet soup to aggregate confusion to mission impossible.”

To resolve this issue, the role that technology can play and how it will enable the sustainable finance industry to exchange information in real time to support investment decision making must be considered. In addition to this, we must also think about the information that can help close the inherent data gaps across different spheres.

Lockhart-Smith added that to resolve the issue with the “alphabet soup,” “standardisation of corporate disclosures and incremental improvements in KPIs across certain sectors where the latency between the report and when its consumed would be beneficial.” While he admitted that this is by no means revolutionary, partially observed outcomes must also be considered to understand the ESG profile much more holistically.

He continued to explain that organisation must “go beyond focusing on very specific data points” and utilise geospatial data at a pixel level, as well as satellite data and remote sensor data. This extensive use of unstructured data, particularly in relation to human and labour rights can help organisations with their country level assessments. Alongside this, legacy structured datasets will also need to be integrated to provide a system level view of the interaction of economies with nature.

Lockhart-Smith added: “The irony of the TNFD process that we’re in now is its kind of encouraging everybody to reflect on the geospatial aspects of third parties, which comes from remote sensor data, which have nothing whatsoever to do with a corporate entity deciding they are going to disclose. That’s a big change. Look at the data and look at companies as spatially disaggregated collections of assets, not headquarters.

“I think technology is the key to address aggregate confusion, but there is a misunderstanding because there should be some level of decorrelation between different ESG data sources. If you talk to any investor, they will say that they want several sources which are reasonably independent from each other and will collectively triangulate to get a good view.”

In Akerman’s view, how sustainable Tandem Bank is will depend on the aggregate of customer actions. “In a nutshell, it’s not easy being green, but we invest in solar panels, heat pumps and insulation and encourage people to improve, which is a huge vector in terms of making the country greener.”

He added that “there is not enough data, and I am incredibly data hungry to know as much as possible for decision making. But there are some fundamental challenges with data, but data that is relevant can be the biggest sources of insight, such as open banking where we see customer transactions and behaviour.”

Akerman also mentioned that while the bank is using data, “we're relying on averages. We're relying on assumed data, and it's just it's just not enough today because I think there’s a long way to go. We put every source of data we can find to try and correlate these things and use that to derive insight for us in terms of lending decisions and in terms of where we choose to grow.”

Adding his view, Patterson explored how “biodiversity is very tricky to understand from a geospatial point of view. You see two worlds: the ex-situ approach which is using a satellite to look down and then the in-situ approach, which has been on the ground getting great data. In the ideal world, everything would be in-situ data on the ground, and we would really have a good understanding of what's going on. We can then compare that to assets to see what the asset’s impact is.

“At the moment, it's very, very tricky to aggregate at the global level detail into data so we rely on ex situ data such as satellites to tell us - both of those worlds have a long way to go."

What is the role of risk in greening finance and financing green?

An increasing number of financial institutions are reconstructing the structure of their internal risk cycles and ESG reporting to align with ILAAP and ICAAP guidelines. Looking at the future of risk reporting in finance, head of model risk governance at Metro Bank, Suresh Sankaran discussed ESG data and risk in his keynote: What is the role of risk in greening finance and financing green?

Sankaran began by comparing ESG to liquidity in that it is unclear whether it should be dealt with by the government, shareholder, regulator, or consumer. “ESG is the aspirations for the for the economy's objective functions, and it is terribly defined, badly executed, and difficult to measure,” he reckoned.

Sankaran observed that everything dies down to capital, and there is a spectrum of capital, from mandatory/regulatory to voluntary. The “endgame,” as he puts it, revolves around profitability and the pricing structure. Therefore, ESG has implications for valuation and risk management in which sustainable competitiveness can be measured through the differentiation of customers.

“From a risk management standpoint, the concept is very simple. We are cashflow driven, whether it is market risk, credit risk, liquidity, or operational risk, you are looking at forecasted cash flows. Risk is not exceptionally fancy, but in climate, particularly carbon, we are talking about net zero being eight to ten years away, being emission free by 2050. These long-term structures from a risk management standpoint are unheard of when you look at balance sheet management, you are looking at three- and five-year horizons, not at twenty and fifty years. So, you need to have a good understanding of data that goes out so long.”

He questioned what discount factors are applied when that data is collected, how that data can be interplayed with house prices and mortgage ratings from a climate standpoint, and how it can be integrated into regular stress testing.

ESG metrics are not yet useful according to MIT because they are not integrated into the mainstream balance sheet management and stress testing framework. To overcome this challenge, Sankaran continued: “Short term focuses can be ALM valuation, liquidity, behavioural factors, and companies can start to incorporate data slowly relating to climate.

“Then we must start thinking in terms of how these can be converted into cashflows. There are so many people providing you with data sources, not very many people are telling you what to do with that data. It is wonderful to have data, but it is pointless if that data it goes nowhere. So, we start to think in terms of how best to use that data to obtain clarity on ESG methodologies. The most critical element is cash flows; everything done from a risk standpoint revolves around cash flows, and is done from a climate standpoint has to result in the generation of cashflows that are climate-adjusted.”

To move forward, Sankaran argued that financial institutions should be incorporating ESG risks into main risk management frameworks such as ICAAP and ILAAP; that times come when going beyond regulation in the short term is what is right for your organisation.

Sankaran concluded that it is unlikely that regulators will become more resilient and financial institutions need to integrate their own risks to act sustainably and accurate reflect ESG risks. He finishes that companies mistake regulatory compliance as financial sustainability when that is often not the case.

“The nature of regulation is iterative. Starting with a first round of regulations, they then have to refine it, fine tune it and so on. Therefore, the first set of iterative rules are now in play when the regulator sets out payment related variables, and those need to be stressed on balance sheets, but they have not told you to integrate them with your main line statistic,” Sankaran comments. “The next stage, inevitably, irrevocably will be the incorporation of ESG variables into a gap and this is going to happen; it is inevitable.”

How can sustainability be built into regulation and risk?

Following Sankaran’s presentation, Peers led a discussion on how risk compliance and ESG reporting will be approached in the future.

Answering a few questions on differential pricing, climate stress tests in banks, and ESG risk ratings, Sankaran advocated for the differential pricing structure and expresses that he does not believe it to be likely for ESG ratings to be harmonised in the near future, especially considering the resistance to ESG rating harmonisation in the US.

The next panel at Sustainable Finance Live, on how sustainability can be built into regulation and risk, covered the impact of regulations such as the SFDR, TCFD, CSRD and the Green Fintech Taxonomy and how technology can simplify the complexity of existing regulations.

Guillaume Levannier, sustainable investment manager at Lombard Odier Investment Managers, kicked off this session with an advocation of Sankaran’s long term risk framework ideology and three points that need to change within the sustainable finance industry.

These points included ensuring investment managers understand the task at hand clearly, go beyond basic definitions and focus of what they do best, which is conviction across their investments. Further to this, without a clear definition of sustainable investment, “we cannot play right.”

Matt Bullivant, director of ESG, OakNorth, explored these considerations and stated that “banks need to be aware of the data they have and be thinking about data in a much more granular fashion.” He added that businesses do not have a vast track record when it comes to assessing climate change – there is no precedent, no historic. Therefore, it is of paramount importance to prepare for the unexpected, “for what we don’t already know.”

He added that there is a “danger of chasing regulation.” The financial services industry must not worry about reaching goals by 2050, they must focus on “what needs to be done between now and 2030 to get to 2050.” While the UK and European Union are lucky to have forward-thinking regulators, it is more beneficial to reduce uncertainty with good intent and guidance; it is not just about measuring risk and the industry must incentivise closing the gap.

Adam Webb, COO, risk, ICBC Standard Bank, added to this and joked that while “banks love acronyms,” there are an abundance of classifications, labelling and disclosures. “There are 50 shades of green, but not everything is quite as green as another.” Providing an overview of all regulations across sustainability in the UK and Europe, Webb also highlighted that the UK SDR, which focuses on improvements, focus, and impact, will go live in June 2023.

Further to this, his view is that while the SASB, GRI and CDP are all voluntary, there is no interplay. Alongside this, the key regulation that Webb sees coming to the fore is the TNFD, which broadens the scope beyond climate change to biodiversity.

The ISSB, borne from COP25, is also looking to standardise and bring forward a framework that is easier to cross compare. Another regulation to keep in mind for those in the industry is the CSRD, which was approved by the EU just days ago and will come in to action in 2024.

Darshna Shah, chief data scientist, ElastaCloud, agreed that there are many regulations, but this also means that the sector is not starting from ground zero. She mentioned that there is a “lack of correlation between regulations and there are multiple frameworks, so we must apply data and see what is relevant.” While gaps in data need to be found, this starting points allows every organisation to be elevated to the same level of reporting.

Adrian Sargent, founder, ESG Treasury and CEO, Castle Community Bank, concluded that at the first Sustainable Finance Live event in 2019, there was “real hope that the industry would move forward beyond regulation. Although a large number of players have integrated decisioning and capital assessment, “we need to be ready for what’s coming. Things will change thick and fast; as regulations change, we have to manage legacy portfolios too.

“Get it in there, assess it, make a judgement call and adapt for the future as well,” Sargent said.


How can nature be made bankable?

How are different financial institutions approaching climate strategy and sustainable investment? The potential for sustainable investment was explored in the keynote presentation: How can nature be made bankable? by Peers and CEO of sustainable investment company Mirova, Philippe Zaouati.

“Climate and nature are a double-sided coin. Most big companies in a variety of industries realise that they have a lot of dependencies on nature. However, starting to understand dependecies is not enough, they need to have to right information to move forward,” Zaouati began.

Zaouati listed three pillars as part of the roadmap on the impact of companies on nature: the first being participating in biodiversity in nature, the second is helping the market in biodiversity, and the third and most important is investing in nature-based solutions.

As an example, Zaouati cited French fintech Iceberg Data Lab as having the first set of data to report the impact of businesses on nature.

Emphasising that the investment of economic conveyable entities with the objective of restoration can contribute greatly to sustainable development, Zaouati cited the Sustainable Ocean Fund that is working on nature-based projects in Latin America to restore land and water ecosystems and combat deforestation as a successful example of sustainable investment.

Zaouati concluded: “Utilising land and labels to restore land, plant trees, harvest, aiding the local population in partnerships between NGOs, farmers on the ground, and co-investors, and scaling up businesses led by expert innovation will have a long-term impact and is a part of a big roadmap in our investment framework.”

The largest green finance instrument is a bond, but whether they are green, sustainability linked, or conventional, the jury is out on the impact they deliver.

What are the benefits of green bonds vs. green tokens?

Sustainable Finance Live explored how while the BIS are exploring tokenisation of bonds and how new forms such as sovereign sustainability linked bonds are emerging, the use of distributed ledger technology is currently being debated by banks and other financial institutions.

However, can the use of blockchain and encryption algorithms truly help boost confidence in the green bond market? Or do we need alternatives such as rewilding tokens as verifiers of impact? All these questions were debated in a panel led by Richard Peers, who was joined by Shana Vida Gavron, CEO and founder, Endangered Wild.Life; Paul Jepson, head of innovation, Ecosulis; and Professor Brian Scott-Quinn, chairman, ICMA Centre for Financial Markets.

While the session title was ‘What are the benefits of green bonds vs. green tokens?’ Peers explained that it is not a battle. Instead, the sustainable finance industry must consider what is occurring within institutions and within communities. “Is there not merit in both,” Peers asked. Bond instruments are the largest provider of finance for sustainability. However, increased proceeds do not mean impact will be made on the ground.

We are now in the age of sustainability linked bonds and sovereign linked bonds, which do have greater veracity, but also come at a greater cost. The panel explored the capitalisation of nature and whether this means that we lose nature. Should we be pricing nature? Gavron posited that perhaps the sector should separate pricing nature and valuing nature.

By putting a price tag on nature, it could incentivise people to destroy nature. Moreover, by not putting a value on nature, biodiversity could be taken for granted. Gavron continued to explain that we must think about how human make purchases and how we place more value on objects that are more expensive. In this respect, we as a society, are letting nature down.

“We must acknowledge that nature is at the very core of how we survive,” Gavron said. “The greatest service provider – everyone interacts with nature and by not being able to put value on nature is ignoring a large part of our planet. We should feel obliged to value nature and actually recognise the snail in your garden is creating value. Start levelling the playing field and value nature in the same way we value companies. Some species are equivalent to multinational corporations in terms of value,” Gavron explained.

But how do we value nature? How do we manage this value and measure it? How do we make nature recovery and rewilding investable? How do we make nature fit for finance? How do we make finance fit for nature? In answer to these questions, Jepson responded by saying that there have been two large shifts in the biodiversity and conservation world.

“There has been a big shift from the goal to protect nature from humans and corporations to a second agenda where nature recovery and restoration is being viewed as a major opportunity for investment,” Jepson said. As explored in other sessions, there has been no historic precedent to resolving the issue of climate change, so it is difficult to imagine what investment into this space can deliver.

Jepson’s view is to measure what is in front of us and configure ecosystems now that we have the science to back it and can measure the components against function, structure, and integrity. He provided an overview of the Ecosulis digital asset which is a nature impact token underpinned by metrics of recovery. While this token is inspired by NFTs, it is a nature positive biodiversity credit that acts more like a share in a company.

Scott-Quinn also questioned the concept of green bonds and tokens. “If we’re going to save nature and biodiversity, we must consider the energy transition and for this to be successful, funding is required and that will come from the infrastructure of bond markets.” He added that in time, all bonds and loans will need to be green. Investors are buying green bonds – for whatever reason, virtue signalling or otherwise – but the issues persist.

Scott-Quinn suggested that while “blockchain and distributed ledgers will help, it won’t solve the real problems.” The industry has been working on common domain models, which he described as a “blockchain without blockchain” but this could lead to the likes of Swift and Euroclear being disintermediated, which is why they are heavily involved in the creation of these projects.

Decentralised blockchains provide a common view across the chain of events across the bond process and over issuance, trading, clearing and settlement, but it calls into question whether intermediaries need to be abolished, or if they provide the security that is required.

Scott-Quinn concluded by saying that greenwashing still permeates the landscape and the only way that real change can be made is if directors of companies are held personally liable for untruths about how sustainable their businesses are. “The green revolution will fail unless huge number of green litigation cases actually succeed. Directors need to be taken to court and held personally liable for the things that they say, and that is the only thing that will speed up the climate change mitigation revolution.”

What is the transformation challenge?

CEO of Chora Foundation, Gina Belle, explored use cases in both public and private sectors to incite environmental and social change using sustainable strategy in her presentation: 'The transformation challenge: ? uncertainty, Δ strategic innovation, $ capital allocation.' Observing how positive change can be made in the financial industry, Belle touched on how transformative action is becoming more complex in the sustainable finance sector.

Belle explained that Chora Foundation works in disrupted systems at the intersections of SDGs, creating an impact on a societal level, and using financial services to manage risk and adapt to what comes next. She detailed a triple-tiered model of how Chora aims to tackle the current challenges in the space:

  1. Capital allocation: determining the right amount of capital and financial resource to invest in your sustainable strategy;
  2. Strategic innovation: managing investments to respond to present needs and problems that climate change is creating; and,
  3. Uncertainty: coping with strategic uncertainty and risks to your business created by rapidly increasing complexity.

Belle emphasised that Chora examines the evolving role of finance that interacts at intervention, human experiences, and resources; leveraging new resources to create positive value. Moving back to strategic innovation, she defined it as a means to learn ways into change and adaptively manage strategies over time in complex systems.

Belle noted that not many organisations take into account complexity and ambiguity in sustainability strategy, but instead building organisational departments to be compliant with ESG strategies.

“I think one of the opportunity spaces that we identified in the beginning is what happens if we start to create constellations of action and value generation. What we realised is that these things don't neatly plug into each other. Often think about sustainability, ESG, regulation compliance, and data, almost like Tetris; like we are trying to fit everything together perfectly. What we really need is ways of actually forming shared intent, and then using our human judgement and forging informal and social connections between organisations that can attend to the things that sit in between measurable data and all the things that we are trying to fill the boxes in.”

Using a case study of sustainable tourism in Egypt as an example, Belle explained how Chora explored and designed a variety of options to move towards sustainable tourism using the Social System Transformation Canvas, a tool to help manage the complexity and multiple dimensions of a problem. They analysed different journeys towards the desired outcomes, using their portfolio as a source of new solutions and generate new strategic intelligence.

Belle questioned: “Whose job is it to invest in the future of sustainability and resilience of whole systems?” She went on to challenge the audience to be willing to step into a space of unprecedented change, collaboration, and investments inside organisations and across organisations.

“You cannot stay the same and transform at the same time,” Belle concluded.

Sustainable Finance Live – the hackathon

At Sustainable Finance Live last week, a concurrent hackathon was held alongside the keynotes and panel sessions.

Finextra, Responsible Risk and Nayaone provided rooms and mentors for those who entered the hackathon to allow the teams to consider problems, develop ideas, and collaborate with attendees. After the conference, the teams that were formed continued to work together to develop their ideas further. The final five teams presented their work, including those Genpact, Soverio, Deloitte, and Endangered Wildlife OÜ and the winner of the inaugural Sustainable Finance Live hackathon was announced.

The winning team was made up of Priyank Patwa, formerly with Morningstar and M&G; Grace Colverd, PhD student at the University of Cambridge; and Amogh Borkar, lead data scientist at M&G, who presented on democratising geospatial data.

On winning, Patwa said: “What we are most passionate about is that this hopefully helps address something that is meaningful and moves the needle into a space which is making analysis easier. Hopefully we can save some lives, some of the planet, and something which is better for the greater good. That’s what keeps us going.”

Finextra caught up with some of the judges to discuss their involvement in the hackathon and what they’re looking for from the hackers at Sustainable Finance Live.

The judges for this event were Darshna Shah, director of innovation at Elastacloud Digital, David Gristwood, Azure architect at Microsoft, and John Donovan, senior developer at SparkGeo.

When embarking on a hackathon, the initial question for many is: what is the purpose of a hackathon in the sustainability context? Gristwood's view is that “often you’re giving people permission, two or three days to step away from their normal stuff and just focus on this.

"You need to get them out of the office so they can’t be distracted, so you can’t have a boss or colleagues taking you out of it. That gives them permission to try stuff out with no preconceptions that it needs to be successful. Teams need to be able to fail fast - it is much better to spend a couple of days on an idea and find out that it doesn’t it not work, and learn from that, instead of possibly wasting months on a big scale project.”

Donovon added some of his experience: “The hacks I’ve been to have taken the completely non-technical, and the very technical and smashed them together. One of the best was an NHS Hackathon. We had half a dozen to eight NHS workers and that same number of techies who don’t know about healthcare. In this hackathon, the problem faced was that a number of older people who wear panic buttons would push them to have someone to talk to. The solution became to create a sort of ‘party line’ that these people could access through pushing a different big button.”

Shah, who also took part in a sustainability panel at the main conference, said: “I have been doing Sustainable Finance Live events for a while, and it is nice to see it organically grow.”

She continued: “Within the hacks you bring people from different backgrounds together and I think that’s the perfect base point to have those really cool innovative ideas grow. I have been working in sustainability for a long time now and it’s great just to see it gain so much momentum and bring such a diverse range of people together from finance, tech, science, legal, energy and more.”

The judges also pointed out what they were looking in the final presentations. Shah said that through the platform provided by NayaOne, the hackers have “access to loads of data. One of the biggest blocks is usually testing out your ideas. So I’d like to see them come up with an idea that would have a huge impact on our area. Maybe they need to think about how that aligns to different industries, and then use the data to validate these ideas.”

Gristwood described it as “like Dragons Den. It’s the opportunity to bring people together in teams, who are passionate about an idea, and giving them time to research and test it out and come up with a plan. We’re encouraging as much creativity and innovation as possible and that’s what makes it so amazing.”

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