Keen to meet growing investor demands for transparency on the impact of their portfolios, private wealth managers and fund administration firms are increasingly utilising technology-based sustainable finance solutions to upscale their ESG practice.

There are, however, some key challenges that need to be addressed, such as: how do we quantify these tools’ effectiveness? How can technology further catalyse ESG service innovation?

To help answer these questions, Finextra caught up with international finance centre, Jersey Finance – along with fund administration firm, Apex Group, and an impact investment firm, ReVive Impact Partners – to gain insights into the state of play in Jersey.

The state of play

Today, innovation in sustainable finance in Jersey is primarily about innovation in service – as powered by fintech.

In an interview with Finextra, David Postlethwaite, sustainable finance lead, Jersey Finance, said: “Our members here in Jersey are supporting the deployment of capital towards sustainable outcomes – using new tools and technologies to upscale their suite of ESG services, and support sustainably focused companies.”

This evolution in sustainable finance offerings is, in part, being guided by investor demand, who are in the market for independent third parties that can provide credible and robust verification of their ESG credentials, as well as those of their investments. These ESG-minded investors are increasingly looking for a service or product that can manage and rationalise data, in order to drive change via an active engagement with their investments.

At the same time, regulators around the world increasingly expect asset managers and owners to make disclosures that accurately reflect the sustainability their portfolios and processes. These mega-trends are re-shaping the demands placed on service providers in the investment supply chain – including those in finance centres like Jersey, which are regarded as centres of governance and administration excellence of asset-holding structures.

In an interview with Finextra, fund administration firm – and member of Jersey Finance – Apex Group’s managing director, ESG Ratings & Advisory, Andy Pitts-Tucker, explained that when it comes to the private markets in particular, investors are increasingly looking for “full lifecycle assessments.” That is to say, a product that enables investors to assess and monitor the ESG credentials on their investments from the pre-investment due diligence stage, through to portfolio or investee company to eventual exit.  

Apex’s online ESG platform helps meet this demand by enabling private equity funds to store and analyse data for their portfolio within a single digital platform. The solution generates reports to provide a ‘plan of action’, or roadmap for ESG improvement, as well as a toolkit for integrating ESG considerations into investment decisions.

ReVive Impact, meanwhile – which partners with early-stage technology companies that have an intentional positive impact on the United Nations’ Sustainable Development Goals (SDGs) – helps investors establish the impact of projects through the ‘Paragon +Grading’ tool. Produced by Jersey-based company, Paragon Impact, the tool is grounded in internationally accredited frameworks and principles, is designed to reduce ESG complexity and supports informed decision making – revealing to the market how closely aligned projects are to the SDGs.

“We're running out of time to solve our global problems,” said Caroline Wallington, head of sustainability, Paragon Impact. “At Paragon Impact, we put our heads together and came up with a methodology that took on as many standardised approaches as possible – while also being innovative at the same time. We teased out the technology, the tools, the methodology, and packaged them together to make a globally accessible cloud-based platform – instead of having it sit with just one consultancy.”

Over the past decade, demand has been rising for companies, non-governmental organisations (NGOs), and investors to illustrate how sustainability and ESG impacts are being integrated into risk and decision-making. Tools like Apex’s and Paragon’s are key to assessing an entities’ contributions to the SDGs. Without an ability to track ESG impacts, positive changes in the economy, the environment, and society-at-large will be too challenging to affect.

Tool development: The case for data-powered fintech

The lynchpin of tracking ESG impacts is, of course, financial technology. Firms in Jersey are developing improved data analytics systems to accurately assess and manage environmental and socio-economic impacts.

According to Pitts-Tucker, technology’s critical role in upscaling ESG is centred around reducing the operational burden of ESG data collection and management: “It underpins the collection of quantitative ESG data and allows for benchmarking versus an investment’s sector peers; itself over time; and against best-in-class global standards.”

Science-based data is one area that needs to be digested by big data analytics techniques, in order to create a holistic picture of sustainable finance opportunities. Using robust analytical approaches to filter vast volumes of information, fund administration and wealth management firms can implement predictive models to improve decision making for their clients.

According to a recent ODDO BHF AM report, ‘Weathering the storm of ESG complexity by leveraging AI’, AI and machine learning (ML)-based analysis technologies – which filter quantitative and qualitative ESG information from multiple sources – offer an effective solution to complex data management, oversight, and alignment of frameworks – acting as a catalyst for sustainable investing at scale. With the help of cutting-edge fintech, data and framework complexity management can be converted into an opportunity for financial firms. By triaging multiple ESG data inputs, a holistic and long-term view on ESG risks and opportunities can be established.

“The more companies you assess,” said Philip Faure, co-founder and CEO, ReVive Impact, “the more datasets you build, and the more correlations you spot between industries. With the help of ML tools, this mining of information can lead to predictive analytics.”

To ensure it is dealing with high-quality data, Apex’s ‘ESG Ratings & Advisory’ platform gathers primary data on ESG metrics direct from companies themselves. This raw information is then checked and verified by the Apex team. “We use a combination of software and human intervention to generate roadmaps to ESG improvement from the company, based on the collected data,” explained Pitts-Tucker.

The effectiveness of these tools, however, are limited by the extent to which the datasets it leverages are comprehensive. While the private market does utilise historical data to inform ESG-related decisions, continuously evolving threats to the planet mean new or alternative data must be mined and managed in order to prepare for new ESG-related trends.

Innovation in service: Paragon Impact

Pressure from investors, employees and customers alike means that ESG ratings have become critical metrics for success. In order to meet regulatory developments, reduce risk, and produce superior returns, a pioneering approach to tool development is needed.

Paragon Impact’s grading tool, hosted in the cloud, produces results via the use of an assessment – be it positive or negative – of a given project’s sphere of influence by following a robust, credible, and quantitative three-stage process:

1. Data input
2. Analysis
3. Output

Each of these steps occur at speed within Paragon’s engine, but for the purposes of explanation, let’s break them down.

For stage one to be successful, a steady stream of detailed, holistic, high-quality, and verifiable data is inputted. The grading tool then dynamically aligns this information to global standards, principles and frameworks that are relevant for the company, investment, asset, or fund being assessed. The standards to select from include the Global Reporting Initiative (GRI), CDP disclosure insight action, and the Business Call to Action (BCTA), with more to come.

Once the ESG data is captured, the tool initiates phase two in the assessment process – the analysis. Herein, the assessor uses ESG data responses to inform their detailed assessment of Paragon +Grading’s 50-plus impact statements – which are mapped across all 17 SDGs, their targets, as well as select ESG international frameworks and standards. Impact scores are then calculated using multiple weighted algorithms at all levels of assessment, with an overall grade being provided across all SDGs – including one for each of those selected as “core” to the entity being assessed.

Using these scores, the tool presents an interactive dashboard, aligned with the three ESG arms; the six SDG sub-themes; as well as each SDG. This gives users an increased awareness of their positive impacts, as well as an ability to manage or mitigate ESG risks and improve their reputation capital.

The tool also provides evidence-based reports required for signatories of principles such as the International Finance Corporation (IFC) and the Principles for Responsible Investment (PRI).

Innovation in service: Apex Group

Fund administration firm, Apex, meanwhile, was one of the first fund service providers to launch an ESG ratings and advisory service. It’s end-to-end service for the private markets helps investors unlock value and drive transformational change on the ground.

By 2020, Apex had rolled out its rating tool in Jersey, which provides fund managers with a dashboard that displays an ESG score of their standing investments. This engenders greater levels of transparency by enabling managers to understand – in a measurable, comparable, and credible manner – the impact of their capital allocations.

According to Pitts-Tucker, the tool manages the collection of data for investors from their underlying portfolio investments in order to deliver real-time ESG analysis via a secure and flexible online platform: “We provide private market participants – namely, general partners, limited partners and lenders – with best-in-class ESG methodology and data analytics tools for scoring, rating, and benchmarking companies to positively impact business today for a sustainable future,” he explained.

What’s more, the benchmarking aspect of the tool enables companies to compare the ESG performance of their investments against sector peers; against global standards such as the UN SDGs, as well as the company itself over time.

Apex’s solution covers the entire ESG journey: from scoping, through independent intelligent data collection, analysis and reporting, as well as advisory services that drive positive ESG progress along an ‘E-Daption Curve’.

Here are all the services delivered via Apex’s proprietary, cloud-based platform:

1. ESG health checks;
2. ESG rating, reporting and benchmarking – measured in accordance with international standards and the 17 UN SDGs to ensure integrity, relevance and longevity;
3. Gap analysis;
4. Carbon footprint assessment; and
5. Investment manager assessment benchmarking against peers and aligning with UN Principles for Responsible Investment (PRI) and EU Sustainable Finance Disclosure Regulation (SFDR) requirements.

Having launched in 2020, Apex’s ESG solution has gone through the full annual assessment lifecycle with many of its investment manager clients – allowing them to clearly measure and demonstrate improvements in their portfolios’ ESG ratings. “By deploying intelligent ESG data and insights,” said Pitts-Tucker, “we aim to drive capital toward ESG performance while influencing significant behavioural change.” This cultural shift is key to keeping the decarbonisation agenda alive.

Apex’s digital tool has been well received, with regulatory interventions such as the SFDR, and public sentiment around ESG issues catalysing adoption from over 40 countries around the world. Today, entities of all sizes, sectors, and investor types (including reinsurance broker, BMS, and private equity firm, Elysian Capital) are up-and-running on the platform.

Such innovations in Jersey’s sustainable finance services are compelling evidence that the space is moving rapidly. “The offering from Apex is really useful because it drives a number of things,” explained Postlethwaite. “It drives transparency, it helps fund managers comply with regulatory obligations in the EU – for instance, around disclosure – and it meets investors’ expectations for credible data. This means people can understand, in a measurable and comparable way, what their investments are really doing.”

Crucially, the availability of such tools is accretive to Jersey’s appeal to global investors when structuring their investments, and will be a critical success factor as an international finance centre.

Quantifying impacts: The challenges  

The pursuit of impact assessment is not a new field; it has been sitting within a niche corner of the market for a long time. The International Association for Impact Assessment, for instance, is over 40 years old. Only gradually have finance, banking and sustainability practitioners woken up to the importance of quantifying the effect of their investments.   

The Paragon Impact and Apex case studies paint the picture of impact assessment being plain sailing. Yet, the lack of a universal standard for reporting ESG performance is the source of many challenges.

“In some of the existing ESG ratings platforms, data is scraped from public resources that can often be largely subjective and/or cleaned,” pointed out Wallington. “Unfortunately, we thus have a lack of real verifiable data out there, whereby there is limited engagement with the data owner. This results in ESG ratings being taken at face value. While our system is by no means perfect, we are working on how to standardise and compare impact measurements. This is something our comprehensive grading methodology seeks to solve.”

Crucially, Paragon’s tool delivers much-needed accuracy, in terms of how entities are measured, and digs a little deeper to ask the “so what” question on existing ESG data resources.

Much like Paragon +Grading, Apex anchors its data analysis in objective, rules-based scoring – as defined by global standards. For questions that demand documented evidence (such as the quality of a policy or an implementation plan), Apex seeks to verify the data and abide by clearly defined scoring rules to ensure objective results.

“Apex ESG does not independently assess the sustainability of an investment manager,” explained Pitts-Tucker. “Instead, it benchmarks against global regulations and standards. Apex has consolidated these frameworks that are defining ‘best practice’ in the ESG space, including the EU’s SFDR, the Task Force on Climate-Related Financial Disclosures (TCFD), and the UNPRI. These regulations and standards define what a sustainable investment manager is, based on global consensus.”

Having collected meaningful data, Apex assesses how well aligned a respondent is to global standards. “We are not judging good or bad, but simply mapping responses to these international standards so that our methodology around scoring is objective,” argued Pitts-Tucker.

How global frameworks are weighted by these tools is yet another big challenge in the mission to quantify impact. Paragon, for its part, has a four-tier scale to mathematically weight each SDG, explained Wallington. This enables what would otherwise be an overwhelming process into something that is specific, measurable, accurate, and time bound.

“Whichever way you slice it, there's always going to be some level of subjectivity – introduced by humans – to impact assessment systems,” argued Faure. “This comes down to, among other areas, the importance experts place on each metric.” The key is to set measurement tools up in such a way as to average out the subjectivity by baking detailed steps into the weighting process. “It’s also about accurately converting qualitative data into quantitative data,” he said.

Clearly there is room for improvement, but the space is only just getting started. Tools like Paragon Impact’s and Apex’s will continue to evolve, with the help of automation and ML to rationalise the vast data volumes, for a number of years to come.

Supporting compliance: The fintech-regtech grey area

Naturally, financial and ESG technologies do not just provide greater transparency. They can support compliance efforts.

“To the extent that these tools also allow fund managers, for instance, to comply with their regulatory obligations, you could argue that it's regtech as well,” noted Postlethwaite. “Indeed, the boundaries between fintech and regtech – which are not always clear at the best of times, particularly in places like Jersey – are actually more blurred now that they're sitting in the sustainable finance world. Some disclosure obligations are becoming regulatory obligations – they’re not just investor expectations. They're not voluntary standards anymore.”

The UK’s recent announcement that it will be mandating TCFD-aligned reporting for UK corporates and financial institutions, for example, is yet a further regulatory intervention that is driving a need for disclosure solutions.

In early 2021, for example, Apex launched Invest Check – a tool to help financial market participants collect the necessary data to report on and comply with the SFDR. “Invest Check is underpinned by Apex’s proprietary software and simplifies the process of regulatory alignment through robust data collection, which is benchmarked against international regulations and standards,” said Pitts-Tucker.

By evaluating an asset manager’s sustainability strategy – at both manager and product level – Invest Check can track performance, as well as identify, understand and act on key gaps in ESG datasets, based on regulatory standards. All information is then presented in a format that mirrors the SFDR template, thus streamlining the submission process for managers.

In conjunction with the compliance solutions team, Apex also closely monitors the evolution of global regulation and best practice to ensure the methodology enables clients to comply with any new legislation in the area. This process supports a company’s journey toward ESG best practice, and helps it stay abreast of upcoming regulatory or disclosure requirements.

Despite the long-awaited introduction of the SFDR legislation, commented Pitts-Tucker, many managers lacked an understanding of its implications for their business and required urgent support to comply with the reporting demands. For many, ESG data was collected and stored in spreadsheets. “With Apex’s platform, managers can be sure they collect, analyse and report on the right ESG data – driving the end goal of improvement.”

By streamlining the compliance process in this manner, Apex’s tool saves costs in terms of the resources that need to be dedicated to benchmarking and disclosure. “Our ESG products and services help deliver operational, and resource efficiencies,” said Pitts-Tucker. “Collecting, analysing, and monitoring ESG data in the portfolio is no easy task – especially in a changing regulatory environment. It requires skills and technology sets that are often not readily available in-house, due to the time and cost they require to build.”

This element of Apex’s solution conveniently meets investment managers’ demand for firms with the specialist knowledge necessary to make sense of ESG data, as well as stay on top of regulatory changes and best practices.

Today, disclosures around ESG are only going one way – and regulation is, in part, driving this trend. Different jurisdictions are likely to define their own regulatory disclosure requirements initially, but there will be global consolidation further down the line.

“It’s just a matter of time before entities will be required to present their audited financial statements alongside their independently audited impact grading,” noted Faure. Indeed, recent announcements at COP26 – including the creation of a global body to oversee convergence of reporting standards by the International Financial Reporting Council (IFRS) – support the view that sustainability disclosures are increasingly being placed on a similar footing to financial reporting.

Servicing innovation in Jersey

Benchmarking in ESG has been critical to publicly listed companies for a number of years. This is now becoming increasingly true of private companies too.

Looking ahead, proprietary databases of anonymised private company information will enable companies and their investors to understand where they are in relation to the market, and drive meaningful change based on the areas they are falling short against their sector peers, or global standards.

By Postlethwaite’s estimation, fintech tools are accelerating this charge – particularly around Jersey’s ESG service innovation. Perhaps the most significant output from the services outlined is the ability to drive on-the-ground change, and slow down our approach to the UN’s 1.5-degree Celsius danger zone. Any data collection, rating and reporting procedures must, ultimately, serve to green our economy.

To deliver on the SDGs, further innovation – linking ESG data to positive change programs more closely – must be encouraged beyond Jersey. By managing fresh and rich data to meet investor expectations of transparency and comparability of disclosures, fintech has a leading role to play in the scaling up of the sustainable finance sector globally.