Technology can help implement the ESG criteria and reduce relevant cost
By Nicole K. Phinopoulou, Lawyer, Banking Financial Services, ESG & Sustainability Policies, LLB. LLM. LPC, CISL, University of Cambridge.
The continuous increase of investments that consider Environment, Society, and Governance factors (ESG), has greatly and in various ways affected the Financial Services sector (Investment Financing & Funding).
Recently, the World Economic Forum has identified and clearly stated that Sustainable Investing has become the norm and is on the rise, with assets under management having surged from $30.7 trillion in 2018 to $35.3 trillion in 2020 and have set new records in 2021, on a trajectory to hit $50 trillion by 2025.
From the billions invested in green and sustainable products to the institutional efforts to integrate the ESG criteria into lending and investment processes, the big banks’ zero-emission commitments, and the solutions developed by financial technology companies (FinTechs) to address various issues – mainly those related to climate and environment, all demonstrate that the financial services sector can play an essential role in achieving a fundamental shift towards Sustainability.
In an extremely transcending environment, it is clear that there is no time for inaction. It is also clear that the use of data in the decision-making process and the need for sustainable corporate transformation are prerequisites.
Directly intertwined with the broader Sustainability Policy of an organisation is the concept of Sustainable Finance. This is something that is increasingly sought after by investors in financial products or fund investments. The trend is that Investors are now urgently seeking to link and align financing solutions with the overall Sustainability Strategy of organisations acting as the issuers or funding providers or financial supporters. The European Union (EU) has introduced radical regulatory tools exclusively for Sustainability purposes. The EU Action Plan on sustainable finance, adopted in March 2018, aims to address this investment challenges as part of the Capital Markets Union’s (CMU) efforts to connect finance with the specific needs of the European economy to the benefit of the planet and the society (Road Map on Sustainable Finance).
However, under these circumstances, while most companies and organisations recognize the need to integrate the ESG criteria and the implementation of the United Nations Sustainable Development Goals (SDGs), it has been observed that they face difficulties to understand the valuable meaning of ESG factors and the accurate Sustainability definition. Therefore, it is already evident that organisations may not properly implement a specific and targeted policy for the implementation of their Sustainability criteria and goals. As a result, their strategy often fails or incurs increased costs.
However, combining Technology & Sustainability can lead to the desired results since it is clear that they can interact positively creating strong synergies and reducing costs. Fintech can facilitate the transformation of businesses while at the same time assisting in the implementation of the ESG criteria. The technological development motivates and impels financial organisations to place more emphasis on sustainability issues, in addition to the fact that consumers are already looking for automated technological solutions for the execution of their (digital) banking transactions. FinTech companies are in a position to offer solutions for the promotion of financial products and investments.
Simultaneously, the need for financial services to adapt regulatory frameworks and supervisory practices to new data has been recognized internationally. There is an urgent call for action to monitor new market participants, facilitate the safe entry of new products, new activities, and special intermediaries, without disrupting the financial stability, and without compromising confidence, nor jeopardising the ability to respond to risks. Data-related infrastructures are equally important. Both in terms of cybersecurity and in relation to the risks of over-concentration, ownership, protection, and data privacy. In this environment, digital technologies could lead to revolutionary innovations to build trust, increase transparency, and accurately track financial transactions.
These developments have already made the financial system much more efficient in the effort to further activate Green Finance. At the forefront of these efforts are three technologies: Blockchain, Machine Learning (ML) & Artificial Intelligence (AI) and Internet of Things (IoT). All three are at the heart of FinTechs’ solutions and can go a long way in helping financial institutions adapt their business model to an ever-changing environment. They can also assist them to be in constant compliance with regulations, increase their resilience and adaptability, and enhance their business growth rates.
The contribution of the solutions provided by FinTechs for the achievement of Sustainability can prove to be extremely significant. It is no coincidence that we already see many financial institutions working with FinTechs or even acquiring them to take advantage of the technological solutions they have developed to achieve their own goals.
In this way, technology and sustainability go hand in hand and when they are combined in the right way can lead to the achievement of international Sustainable Development Goals much faster and in a more structured manner.
