While ESG is gaining traction among investors, a lack of common definition around what makes a ‘sustainable’ company or what constitutes good ESG practice could cause problems when it comes to reporting ESG.
The lack of consistency in approaches to ESG is an issue which Charles Sincock, managing principal and ESG lead, Capco, calls a “real worry” for the investment market.
A new paper from Capco, named ESG in financial services – today and in the future, argues that technology and better data collection will play a key role in enabling financial institutions to be certain they are investing in a truly sustainable cause.
According to the management consultancy firm, financial institutions would benefit from using AI-driven sentiment analysis, which it believes would help overcome the shortcomings around ESG measurement and public perception.
Information networks could also be utilised to help investors understand the ESG profile of a company through better information gathering, with research able to investigate relevant connections, such as companies’ supply chains or business dealings to gain insights into how companies behave today and in the past.
In addition, Capco says the industry could benefit from combining diverse technologies including satellite imagery, AI sentiment analysis and drones to measure the impact of their operations on the environment in real time.
However, to truly create a standardised ESG picture across markets, there needs to be a way to share data in real time across different industries. Capco says tokenisation, which creates a real time and verifiable shared database of assets with a secure code or identifier, could help solve some of the current issues around ESG measurement.
Commenting, Charles Sincock says: “There needs to be far greater transparency within ESG data and around ESG scoring to enable financial institutions to be certain that they are investing in a truly sustainable cause. Greater transparency comes through better data collection and more reliable data sources.
“Alongside increased transparency, there needs to be a supported, recognized framework which is sponsored by the industry and regulators – the International Organization for Standardization could be a powerful force in providing more clarity to such frameworks.. For financial companies, this would be valuable for all elements of the finance chain, as they would be able to see how well they are performing and also how others are performing.
“The technologies we highlight in our paper can be combined to gain a greater understanding of each organisation’s operating landscape. By better understanding networks such as supply chains, energy usage and employee habits, targeted interventions in response to new information or regulation will be possible – giving businesses the opportunity to approach ESG in a flexible and agile fashion.”
