A rapid response to ESG pressures

Financial institutions are well aware of the importance of transparency around risk. They need to be ready at any moment to respond speedily to regulatory requests, able to demonstrate at the press of a button their operational resilience from a capital adequacy point of view.

It is becoming increasingly desirable that they should be able to replicate this lightning-fast responsiveness in the important area of Environment, Social and Governance (ESG). These days, ESG is not a ‘nice to have’ box to be ticked. It is a central plank of corporate success. Research from Deloitte Insights shows that 59% of companies surveyed cite ESG as having had a positive impact on growth, and 51% on profits. In any case, these days shareholders, stakeholders, institutional investors and indeed customers will expect to see how well you are delivering on your green agenda just as much as they want scrutiny of your risk management.

ESG is a matter for regulators too. Institutions must be able to show their preparedness for dealing with issues like climate and environmental risk as part of their risk processes. The European Banking Authority (EBA) has published a Discussion Paper on the role of environmental risks in the prudential framework for credit institutions and investment firms. The European Commission is in on the act. Its Sustainable Finance Disclosure Regulation (SFDR) was introduced to improve transparency in the market for sustainable investment products, designed to prevent greenwashing and to increase transparency around sustainability claims made by financial market participants.

ESG isn’t just about environmental matters. The social and governance angles demand that financial institutions deal with a wealth of regulation in areas like AML, human trafficking, supplier due diligence and cybersecurity.

All of this requires a level of data agility and flexibility that some institutions struggle with. It’s one thing to have a well-intentioned ESG agenda, quite another to deliver on it with reporting that satisfies everybody. Proving that you are on top of something as multi-faceted as ESG requires a level of coordination between departments that many banks are incapable of, so divided is their business between isolated siloes of activity.  

Deloitte has identified data management as one one the keys to a successful ESG strategy, and believes that showing leadership here is a great differentiator. Specifically, it listed three areas of opportunity to help distinguish enterprises from the competition:

• Implementing a holistic, integrated data and insights program to measure and drive environmental sustainability

• Leveraging a sustainability-driven tech strategy

• Driving accountability and transparency in the value chain

The solution to turning this challenge around and making it into an opportunity lies in an organisation’s data architecture. A so-called event-driven architecture (EDA) transforms a jumble of data siloes, replacing it with the ability to handle data from multiple sources at speed and at scale. EDA provides real-time data access, enabling appropriate response in the moment. By providing an agile data fabric combined with APIs, EDA offers a whole new way to respond to business events, whether that is in the form of a customer touchpoint or a regulatory request.

There are many ways in which this kind of data architecture can support an ESG agenda. For example, when handling a customer’s mortgage application, it would be advantageous to be aware of their intention to replace the boiler in the new property. With the application of EDA-driven analytics, the customer could be offered a preferential rate to incentivise them to make a green choice. At the same time as deepening the customer relationship, you will be able to demonstrate to shareholders and regulators that you have acted on your ESG goals. In this way, delivering on those ESG goals becomes a natural by-product of doing good business rather than the focal point. It’s the ultimate win win.

EDA not only helps organisations to meet legal requirements for non-financial reporting, it can also be part of meeting the expectation of customers that your products and services have a meaningful commitment to sustainability baked into them. It will enable them to see that you are adhering to ESG principles not just in spirit but in action. It might also help put you in line for added support for your ESG programmes in the form of grants and incentives. A flexible data approach will also play well with meeting the expectations of investors who want to drill into more aspects of a company’s management than just the profit margin.

A more flexible data architecture also ties in well with other areas of digital transformation that banks and insurers are working on. Take for example, operational management and resilience. A digital twinning strategy allows an institution to test all of this innovation with little or no risk. How might a change to my ESG strategy impact the business in a wider sense? Do unintended consequences lie in wait? A digital twin of your business will let you model all possibilities up front. 

Many organisations are now reaping the rewards of improving their ESG position with a better approach to data. The Australian Securities Exchange (ASX), for example, was able to decrease the number of customer-impacting security and regulatory incidents by 30% by fostering this approach.

EDA can be the missing link that helps organisations move beyond a piecemeal approach to their data and deliver on the potential of the volumes of information that they hold. Applied to ESG, it could help an institution struggling with its digital goals to achieve a new lease of life and a whole new way of presenting itself to the world.