Sustainable Finance and the Changing CIO Mandate

In 2015, the United Nations Member States released the 17 Sustainable Development Goals (SDGs) focused on key areas affecting the planet. These SDGs have had a very profound impact on the banking and finance sector, launching sustainable finance initiatives and forever changing the mandates for chief information officers (CIO).

At a high level, sustainable finance calls for banks and financial institutions to alter their investment strategy and focus more aggressively on environmental, social, and governance considerations (ESG), specifically in areas such as clean energy, sustainable cities and communities, and responsible production and consumption. The hope is these practices will lead to more long-term investments in sustainable economic activities and projects that will in turn help to address issues such as climate change.

While the goal for businesses is clear, there are significant challenges for CIOs who must put in place processes that allow teams to do the following:

• Integrate this ESG information into the decision-making process.
• Monitor progress, accurately measure efforts, ensure compliance, identify momentum and gaps, and introduce recommendations.
• Clearly demonstrate the business’s commitment to consumers and possible partners and customers who are increasingly making it clear they will only work with banks that share the same values when it comes these issues.
• Communicate financially-material sustainability information to investors.
• Prepare the business to adhere to new legal mandates requiring ESG disclosure, as well as anticipated future mandates.

The best place for CIOs to begin this process may be the ESG Score. This score measures how a business is perceived to be performing on a wide range of ESG categories. The score specifically focuses on public information in areas such as carbon emissions and waste reduction and by analyzing what is being shared and discussed in the public forum, it can serve as a valuable tool for a company to assess public perception of its efforts against what’s actually happening.

The ESG Score also provides the insights needed when selecting possible business partners and investments. However, for this to work, the data must be integrated into a company’s overall process. One option for this integration is provider RepRisk, which ties into existing compliance and risk processes by allowing the ESG data to be integrated into the client onboarding and “Know Your Customer” (KYC) processes across all business lines, from lending to IPOs and advisory to trade, export, and project finance. In doing so, this helps the bank ensure that it is compliant with international standards such as Sustainability Accounting Standards Board (SASB).

SASB focuses on a subset of ESG issues that are most relevant to financial performance. It includes a set of 77 industry standards, which include a minimal set of financially material sustainability topics and associated metrics for the typical company in an industry. 

Developed based on extensive feedback from companies, investors, and other market participants as part of a transparent, publicly-documented process, SASB standards cover issues that relate to five dimensions of sustainability, environmental, social capital, human capital, busines model and innovation, and leadership and governance. They also include disclosure topics, qualitative and quantitative accounting metrics, and guidance on how to report.

Another reporting option available to companies is Verisk MapleCraft, which provides a holistic approach to risk. This approach combines an extensive portfolio of global risk indices with expert analysis and specialist advisory capabilities to help businesses identify, map and manage the exposure of their operations, supply chains and investments against a full spectrum of risks. This includes another set of standards, the GRI Standards.

Unlike SASB, the GRI supports more broad and extensive disclosures on organizational impacts. Complementing SASB, the GRI assessment can be compared with other companies and shared and scrutinized by key stakeholders including investors.  GRI Standards require a real-time analysis of millions of pieces of data, including public news (blogs, newspapers, regulatory reports), social media content as well as any non-governmental organization (NGO) communications where the focus is on efforts around the community.

This analysis doesn’t just measure the volume of data, it takes into account the source of the information, and leverages machine learning and natural language processing to gauge sentiment of what’s being said, among other factors. By working with Verisk MapleCraft, CIOs can make sure the business’s sustainability efforts are in alignments with GRI, ESG and other factors.

The steps above are vital, but the process doesn’t end there. An additional hurdle that CIOs should address to help their business become a success in sustainable finance is to infuse all of this data into the company’s decisioning making process. In reality, most businesses lack rules models and engines to automatically evaluate risk appetite for a cause or portfolio allocation based on approved standards such as ESG factors.

For CIOs, the answer is a data analytics platform capable of processing multiple internal and external data feeds coming in from RiskRep and other providers. This platform must have the ability to analyze data in order to validate the company’s total exposure to ESG sustainability measures and then assess the business’s compliance with the various regulations laid down by the United Nations and other standards agencies.  All findings should be presented in a single, interactive view, which makes it easy for teams to act quickly. Without such an engine, data users will be forced to resort to manual processes, which are not only inefficient and error prone, but also unsustainable.

Today, while there is virtually universal agreement on the importance of sustainable finance, there is less of a consensus on how companies can best measure their efforts, identify new investment opportunities and in the end demonstrate their actions to key audiences. As we move forward, CIOs should rethink internal processes, embrace some of the newer services that have a specialized focused on areas such as GRI and SASB and roll out a platform that can bring these elements together. It’s through this combination that they will be able to showcase their commitment and success around sustainable finance.