ESG in Financial Sector: the fintech role

The United Nations established the Permanent Committee for Finance as part of their extensive sustainability program. Since then, financial markets have embraced Environmental, Social, and Governance (ESG) themes. 

ESG: What is it?

ESG factors encompass environmental, social, and governance criteria that qualify an activity as sustainable. Considering such factors in investment decisions involves directing capital towards businesses and projects deemed sustainable, such as those respecting the environment, promoting inclusivity, worker well-being, and gender diversity in leadership. This approach is referred to as sustainable finance.

Environmental factors involve promoting energy-efficient production processes with minimal environmental impact. Social sustainability factors relate to labor relations, inclusion, community well-being, and human rights. Governance factors address diversity in corporate governance, the presence of independent directors, and executive compensation methods, ensuring that social and environmental aspects are considered in business decisions.

A significant milestone in sustainability occurred at COP26 in Glasgow in 2021, where a coalition of asset managers, banks, and other financial market operators with a combined $130 trillion in assets under management committed to financing the transition to a decarbonized future. However, the ESG wave has faced challenges such as a lack of standards and transparency.

Unlike more established investment methodologies, ESG lacks clear definitions, processes, and types of data. Nevertheless, organizations face increasing regulatory pressure to be transparent about their impact on the world to avoid greenwashing—presenting a false environmentally friendly image. Addressing this situation lies in clean, high-quality, and well-managed data. Without proper data, financial institutions struggle to provide the transparency investors need for due diligence, risk management, and compliance with growing regulatory disclosure requirements.

Using data and ESG analytics to modern cloud platforms and leveraging machine learning, banks and financial institutions will enable better understanding and extraction of insights from available data.

Financial operators are increasingly focusing on ESG criteria in company analysis and investment decisions for three main reasons:

• In 2020, the pandemic heightened the belief among operators that integrating ESG criteria improves company performance, providing better control over financial portfolio performance;
• ESG analysis, also known as “extra-financial” analysis, complements traditional financial analysis, evaluating companies in terms of their environmental, social, and ethical management alongside financial considerations;
• ESG analysis is crucial in selecting stocks aligning with sustainability criteria based on objective parameters.

ESG: applications in the actual scenario

Regulatory authorities addressing reporting framework inconsistencies and fighting greenwashing are placing new responsibilities on companies concerning their activities, client activities, and the companies in which they trade or hold securities. 

The evolving regulatory landscape is pressuring banks to maintain robust and agile data management, impacting customer relationships. Investor social pressures favoring commitments to reduce carbon emissions and establish clear goals have compelled banks to integrate ESG into their sales functions, turning data into both a marketing tool and a regulatory obligation.

Sustainable investment lacks rigid definitions, leading to diverse meanings for ESG across organizations. Investments contend with fragmented regulatory environments and divergent standards, posing challenges for companies seeking compliance.

Providers deliver data in various ways, compiling scores and ratings using proprietary methodologies rarely disclosed. Making sense of this data requires a clear data normalization and mastery program.

ESG in the financial services 

Among various technologies, one available in the market is from our partner Modefinance. 

They have developed a model for assessing a company’s sustainability and generating a proprietary ESG rating. 

This ESG rating service evaluates sustainability performance by collecting environmental, social, and governance data. Modefinance’s proprietary model, rooted in FinTech principles, employs Artificial Intelligence and Machine Learning for credit rating evaluations.

The rating calculation is based on three indicators: environmental, social, and governance. The sum of these indicators provides a score placing the company within rating classes. 

Mia-Platform marketplace allows users to use and orchestrate multiple services. This marketplace integrates 3rd parties components from various partners with internally developed components. 

Utilizing the marketplace’s composable applications presents an innovative approach to software creation, breaking down complex applications into independent components. This approach promotes modularity, reusability, and interoperability of existing assets, improving software governance. 

Adopting composable applications enables companies to accelerate processes, promote innovation, and adapt to market demands, revolutionizing how organizations design, develop, and optimize software systems. 

In the ESG context, implementing applications addressing this front would improve effectiveness in data reception, transparency in data transfer within platforms, and enhance overall user experience through external services.

Conclusion

The ESG project imposes significant organizational and data burdens on many financial service companies. ESG success relies on robust and agile data management structures.

Transparency is essential for the success of financial service providers’ ESG programs, both internally and externally to regulatory bodies, customers, and the public. ESG is a driver of profit and risk opportunities for financial institutions, a key requirement in a growing number of jurisdictions worldwide.
The evolution of ESG is underway, and in a continuously evolving context, all stakeholders recognize the importance of environmental and social themes. In its report outlining effective ESG programs, Gartner states that organizations must act now: “Organizations must prepare now and have a long-term plan to meet growing ESG expectations, continuously refining their programs using the four key components: stakeholder expectations, objectives, governance, and storytelling.” The reward for organizations acting now will be increased engagement from ESG-focused customers, investors, and talent, resulting in a more resilient and sustainable company.