It has been well documented that the lack of a harmonised global regulatory framework is hampering the progress of integrating environmental, social and governance criteria into the investment decision making process. However, there are several technologies that can help address the challenges, according to a new paper by Capco -ESG in financial services.
Research by Capco highlights that a combination of misreporting, lack of disclosure and an overall distrust of ESG related data makes it increasingly hard to judge how compliant firms are with ESG measures. This is exacerbated by different data providers and the many inconsistencies between their sourcing, collation, analysis and critically interpretation.
The paper looks at the new types and sources of data that are emerging in the real economy and how the financial services industry can incorporate them within products and services to generate more coherent ESG information and drive better decision-making:
This includes AI-driven sentiment analysis that can be used to access unstructured data which comprises around 80% of the world’s data. This could open new opportunities to investigate sentiment towards companies via previously unavailable information.
The paper also mentions network theory which can be leveraged to help understand the ESG profile of a company through better information gathering. Researchers can investigate relevant connections, such as companies’ supply chains or business dealings, to gain insights into past behaviour and the likelihood of them behaving unethically in the future.
Moreover, it advises using information from diverse industries to make widescale ESG reporting possible. Firms could, for example, combine satellite imagery, AI sentiment analysis and drones to measure the impact of their operations on the environment in real-time.
Last but not least is tokenisation which can paint a standardised and coherent ESG picture across markets by creating a real-time and verifiable shared database of assets.
Charles Sincock, Managing Principal and ESG lead at Capco, says, “The lack of consistency in approaches to ESG is a real worry for the investment market. 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.”
He adds, “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.”