Unlocking ESG data: 4 fundamental ‘concepts’


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Today’s global financial leaders, from central banks to financial regulators, are increasingly focused on issues surrounding climate change and sustainability. There has also been a shift in attitudes from policymakers and legislators who now recognize the important role the financial system must play in getting companies to take the necessary steps to move the economy to net-zero emissions.

The risk of climate change to both global and individual economies can only pose a threat at this point. However, if that climate risk starts to take shape, it could have a significant impact on asset values, especially with the current understanding of climate risk exposure across sectors, and could lead to a significant decline in asset prices. It’s time to discuss the key insights companies should focus on to unlock ESG data and how AI technology can be used to redirect capital from carbon-intensive to green investments.

1. The Regulatory Environment

The tools developed to tackle the global financial crisis are now being used by regulators to tackle the issue of climate risk management and the development of green finance. With so many of these initiatives underway, the industry will soon see an influx of ESG-related behavior and prudential requirements – which will then be accompanied by new reporting and management requirements, including monitoring and oversight.

While organizations may have questions about the implications and impact of these new rules and regulations, one thing is clear: it is time to move beyond adopting ESG practices. Companies must be able to prove these efforts. According to recent reports, following the unprecedented market and policy momentum behind ESG in 2021, investors, boards of directors and government leaders have raised expectations for progress on climate commitments in 2022.

As financial institutions take practical steps to implement sustainability in their services and operations, companies should follow suit, especially given that sustainable business practices are increasingly attracting the attention of investors and acquirers. That said, many companies are proceeding cautiously to avoid allegations of greenwashing, leaving many companies hesitant to advance ESG plans. This is often due to the fact that we don’t have a clear path forward or are afraid of “doing it right” in the public eye. It is more than just adopting a new business model and investment strategy; it starts with analyzing back office activities and assessing the impact of climate risks on the existing business.

2. The vital role of data

In a data-driven world, it’s no surprise that data plays a vital role in financing and measuring the impact of the transition on asset values. Product-level sustainability data includes accurate environmental impacts and financial investment results, such as stocks, bonds, loans and derivatives. This is essential for assessing climate risk exposure, informing green investment decisions and securing capital flow. While most companies have an abundance of data, the main challenge they face is generating consistent, standardized and actionable data at the product level.

What makes this so challenging? Well, up to 90% of business data is unstructured, making that data useless for most businesses. By unlocking the hidden value of that data, it could serve as input to pricing engines, risk management tools and more — part of the data so essential to the financial services industry. But to do that, companies must first lay the foundation for ESG data and leverage the right tools and technology that have the power to unlock the value of data.

3. The foundation of ESG data

Beyond the vital (and somewhat obvious) role data plays in this arena, understanding the foundations for ESG data is critical. The insights hidden in this data form the basis for important financial decisions, and the need for this data is dictated by uncertain regulation and is based on industry-leading standardization efforts. Around the world, regulators are setting the standards for sustainability data at the product level through regulations such as the European taxonomy for sustainable activities, the UK green taxonomy to address greenwashing and the US SEC’s recent proposals to support mandatory climate disclosures.

In addition to the regulatory environment, private organizations are also developing industry standards and best practices – further proving that green initiatives play an increasingly important role in funding and funding opportunities. For example, the Equator Principles are guidelines to help lenders and other financial services providers better understand the impact and climate risk of their activities when financing projects.

In addition, global industry associations such as the International Capital Markets Association (ICMA) and the International Swaps and Derivatives Association (ISDA) are also leading the way in setting standards for adopting sustainable practices and measuring those efforts. These associations are at the forefront of defining and classifying these ESG-related initiatives and setting the standard for industry-wide best practices.

4. The advantage of technology

With the understanding of the importance of data coupled with the foundation that drives ESG data, organizations must also use technology to unlock the value of data. Financial institutions, lenders and issuers are increasingly incorporating tools into the legal and contractual documentation governing the financial instruments and transactions in which they participate – essentially, ESG data fuels modern financing and investment.

Anticipating a regulatory framework in the near future, it is important for both financial services and businesses to adopt the best practices, principles and standards developed by industry leaders – and invest in the climate technology that enables a data-driven ESG proposition . To achieve this, companies must analyze their contracts and documentation and proactively incorporate ESG-related data points into key business decisions.

Technology offers a significant advantage because the data measuring the impact on sustainability and assessing climate risk is contained in contracts and documentation. Whether these documents are old or new, organizations need a way to quickly extract the data and turn it into impactful statistics and reports that can be used for decision-making. If companies wait to start this work until regulations are complied with, they will be at a disadvantage. With thousands of documents to analyze, companies must leverage the power of AI technology to extract, classify, and interpret the data captured in their documents, enabling smarter business decisions, eliminating manual processing, and making data flow fast and accurate. is optimized.

As environmental, social and governance (ESG) issues continue to drive executives’ agendas, understanding the changing regulatory landscape and the role of data in measuring green initiatives is essential for financial services firms and businesses alike. , the foundation of the data that drives ESG efforts and the benefit of using AI technology to make better financing and investment decisions.

Lewis Z. Liu, Ph.D. is co-founder & CEO of Eigen Technologies.

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This post Unlocking ESG data: 4 fundamental ‘concepts’

was original published at “https://venturebeat.com/2022/04/22/unlocking-esg-data-4-foundational-understandings/”

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