Sustainable Finance Live: Is sustainable finance sustainable?

The keynotes and panel discussions fed into the design of solutions for the associated hackathon and unconference, where attendees were able to have open conversations about all ESG related points.

Founder of ResponsibleRisk and contributing writer for Finextra, Richard Peers, kicked of Finextra’s fifth annual Sustainable Finance Live by introducing the main themes of the conference: data, risk, and financial instruments. The conference opened up the fintech space for connections and discussions to catalyse change in the sustainable sector.

The event had three tiers, Lean Back, Lean In, and Learn by Doing. Lean Back is the conference in which we heard from leaders defining sustainable finance. Lean In is the unconference which brought experts together around the problem statement to discuss new technologies and data science innovations that can change the industry. Lastly, Learn by Doing is the hackathon that will be tackling common challenges in the sustainable fintech industry.

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 rearview 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.”

Decarbonisation has become a hot topic in the fintech world, with many companies monitoring both their carbon emissions and energy usage in order to meet ESG goals. However, greenwashing has become more prevalent in the sector along with the onset of sustainable finance. In his Keynote presentation, Is sustainable finance sustainable? House of Lords Peer, Lord Christopher Holmes spoke on 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 rearview 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.”

Holmes said that he is most excited about data collected by satellites and sensors, which are able to 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 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 have 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.”

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."