24 Mar Improving ESG performance in financial services on Microsoft Cloud
Overcoming data-related challenges will be key for banks and other financial institutions to make progress toward sustainability and other objectives.
Anxious to meet international standards, satisfy investors, and profit from a growing array of sustainable products, financial services firms are intensifying their focus on environmental, social, and governance (ESG) goals. While the incentives for ESG are compelling, managing programs and demonstrating success are fraught with challenges. But by adhering to the right standards and using technology to better organize programs, financial firms can gain a clearer vision of their ESG operations and speed up progress toward their goals.
Doing well by doing good
Many financial institutions are striving to align ESG programs with the United Nations’ 2030 Agenda for Sustainable Development, which lists 17 goals designed to end global poverty and promote an equitable transition to a sustainable world.
“Companies across the globe are adopting the 2030 Agenda and UN SDGs Framework to ensure sustainable investments and operations,” says Kishan Changlani, Partner for strategic initiatives – sustainable banking, at Tata Consultancy Services (TCS).
Financial services firms can use the 2030 Agenda and UN SDGs Framework as a guide for allocating ESG funds, such as creating a “green economy” team dedicated to helping companies that produce environmentally friendly goods and services. Leadership teams are also learning that ESG initiatives can boost business performance. One 2022 study found that organizations placing greater emphasis on ESG over the previous three years saw revenues increased by almost 10%, compared to 4.5% revenue growth from businesses showing a lower commitment to ESG.
Overcoming data challenges
Despite their growing commitment to ESG, financial firms have learned the path to sustainability and prosperity can be rocky.
“ESG data quality is the biggest challenge. Quality at the least is about consistent data across asset classes, effective data for scenario planning, and harmonized ESG ratings amongst other aspects,” Changlani says. However, there are many other challenges as well, including regulatory requirements, human capital, stakeholder engagement, alignment of materiality and performance, and the need to embed ESG into an existing ERM (Enterprise Risk Management) framework.
“The ESG regulatory landscape resembles an alphabet soup where the number of ESG standard-setters, data aggregators, analysis providers, ESG raters, and indices is increasing,” says Changlani.
Financial services companies may also find it challenging to keep up with a broad scope of reporting requirements, resulting in a complex set of documents and deliverables that can lead to questions about a program’s validity or perception of greenwashing.
Technology can help banks and other financial institutions overcome these hurdles. For example, TCS has developed a suite of solutions on Microsoft Cloud to unify and integrate ESG metrics and accurately measure performance. Changlani also recommends that companies limit data vendors to two or three and establish their own ESG benchmarks, instead of relying solely on external providers.
Emerging technologies will further speed ESG progress. AI and machine learning algorithms can monitor compliance in real time. With natural language processing, organizations can analyze millions of reports quickly, helping them avoid pitfalls associated with greenwashing and other discredited activities.
Blockchain technology can track assets across the supply chain, promoting transparency and credibility.
“Technology is the key to helping the financial services industry move toward the greater good,” says Changlani. “It is what will make achieving the UN 2030 agenda possible.”
Learn more about how TCS and Microsoft are powering the sustainable enterprise.