As the transition to a low carbon economy intensifies, in the Nordics and elsewhere, there is an increasingly strong focus on improving sustainability related information and transforming business activities in the financial sector. Some insights from the field.
I must admit underestimating the Brussels effect when I started out at the European Commission 12 years ago – working on the EU SDG Action Point (back then they were being referred to as MDGs). Looking back, and considering the momentum created by the EU Action Plan on Sustainable Finance, that experience future-proofed my sustainability journey.
Let me explain.
The EU Action Plan on Sustainable Finance puts Environmental, Social and Governance (ESG) considerations at the heart of the financial system:
• For example, the Sustainable Finance Disclosure Regulation (SFDR) requires financial market participants and financial advisers who provide investment advice or insurance advice regarding insurance‐based investment products (IBIPs) to publish written policies on the integration of sustainability risks – ESG – and ensure transparency at both entity and product-level of such integration.
• Further, the EU Taxonomy – a classification system establishing a list of environmentally sustainable economic activities – ensures a unified classification system for which economic activities or investments can be considered environmentally sustainable.
To meet the requirements of these regulations, the financial sector is grappling with new ways of doing (sustainable) business and, most important, doing business in a sustainable way. That is, aside from understanding the applicable EU Regulations, there is a need to understand the expectations of key stakeholders (customers, employees, investors) as well as what the competition is doing to clearly grasp which actions are required to ensure regulatory compliance and business value realization from sustainability.
Major pain-point: ESG Data
Understanding applicable regulations and their impact on business – ESG requirements verification, people, source and systems mapping plus stakeholder alignment – seem easier compared with identifying required ESG data.
What ESG datapoints are needed to fulfill disclosure requirements or to perform portfolio climate risk assessment? Are there sufficient data elements at hand or is there need for external data? Which sources of external data are most appropriate and is their data universe sufficient in view of customer segments, existing offerings, processes, and reporting needs? These are some of the major pain-points clients are struggling with.
And even where the ESG data is sufficiently available, determining the appropriate quantitative thresholds remains a challenge. This is due in part to the unknown extent of potential material impacts despite a good understanding of a company’s ESG risk exposure, as research conducted by Danske Bank and the SASB (Sustainability Accounting Standards Board) Materiality-map suggests. Of the 100 largest listed Nordic companies, only 17% have full coverage of material topics that could affect their financial performance. This implies that it is difficult to understand how the remaining 83% may be exposed to key sustainability issues.
The promise: Technology
Enabling our clients use technology to address these challenges is what makes us a trusted partner for ESG integration. Cognizant helps companies modernize technology, reimagine processes and transform experiences so they stay ahead in a fast-changing world. More specific, our practice helps clients create business advantage by leveraging secure, private, accessible data on the one hand and, on the other hand, AI and analytics to build accessible, trustworthy, and future-ready data foundations.
Evidence supports the fact that the financial sector continues to find promise in using technology. A study from our Center For the Future of Work, Green Rush: The Economic Imperative for Sustainability, surveyed C-suite and VP-level business leaders across Europe and North America about their use of technology and innovation as it relates to sustainable business practices.
The findings indicate rampant technology adoption, with increased spending on everything from IoT to AI, smart-grid technologies, big data/analytics and blockchain. They also reveal that sustainability initiatives and related investments are expected to result in business gains like increased sales, improved brand reputation and creating and selling sustainability innovations.
Leveraging technology: Data, AI and Analytics
With quality data, AI and analytics, ESG data can be activated at scale, turning vast amounts of information into tangible decisions that solve complex business problems and drive business value realization through sustainable business models and decisions. In other words, a data-first and fact-based starting point for enterprise-wide technology, process, and people transformation in service of identifying and activating new opportunities with ESG data or accelerating ESG integration into existing frameworks.
Some of the regulatory requirements under the EU Action Plan on Sustainable Finance are amendments to existing regulatory frameworks like MiFID II and IDD. This implies that financial sector players need to review existing processes to identify data gaps and put in place measures to fill them. In doing so, and depending on the data collection tools used, they might encounter data privacy and ethical concerns.
Our ESG approach combines data responsibility and privacy knowledge to work with clients to address such concerns. This allows them to not only integrate ESG into existing processes but future-proof them in view of interdependent business risks.
Looking forward: a more efficient and carbon-friendly world
Thus, as the transition to a low carbon economy intensifies, it is a delight to be part of Cognizant where I combine my knowledge of EU Regulations with expertise from industry engagements to enable our clients leverage technology to accelerate ESG integration.
The opportunities to leverage technology and to create a more efficient and carbon-friendly world abound. So, my focus over the past months has been in the Nordics where our services in strategy and roadmap development, benchmarking, goal-setting, data and analytics support for KPIs make us a trusted technology partner to banking and financial services partners as they accelerate ESG integration and support the EU transition into a low carbon economy.
More on that in the next article! In the meantime, find out more about how we’re using these opportunities to reach our own Net Zero goals and how they can help you prepare for climate change and decarbonization, to measure emissions and address sustainability goals: It’s Time To Turn Climate Promises Into Accountability And Action. Here’s How. (forbes.com)