Walter Heck, CTO at HeleCloud
By 2050, all EU member states will have circular economies, having achieved net-zero emissions. While the EU has a head start, the United States also has plans to decarbonize the economy and aim for a net-zero emissions target by 2050. Organisations are already experiencing the financial consequences of falling short on sustainability with some countries implementing carbon tax regulations.
To stay ahead of the curve, players in the financial sector are now integrating Environmental, Social and Governance (ESG) rules into their funding criteria. ESG refers to a set of standards for organisations that socially conscious investors use to screen their investments. Employees, regulators, and investors are placing greater emphasis on ESG factors as these indicate a more resilient and sustainable business. Sustainable finance allows lenders to remain compliant while offering new products, and it gives more options to borrowers.
Financial services firms have a unique role to play in driving sustainability growth into the wider economy. The last 12 months has allowed the world to reset and build an improved economic system that works for both people and the planet, and no sector is better placed to drive this transition to sustainability and a stable future than the finance sector.
Sustainable Finance: The rise of ESG
Financial leaders should expect regulators and policymakers to be relentless regarding the need for greater adoption of ESG. Executives should think of ESG standards as engineering parameters. Environmental sustainability is the best example: Each piece of code that engineers develop will have a carbon impact each time it is executed. Cloud engineers can optimise coding for speed and scalability, as well as improve it to reduce their organisation’s carbon footprint. Cloud transparency makes it possible for stakeholders to pressure organisations to address their needs and for investors to evaluate companies based on their ESG performance, and Cloud IT has become central in enabling the firms to meet their ESG goals.
Before the pandemic, ESG factors were considered a choice between positive impact returns and investing goals. However, investors want to ensure they can continue to earn a return on their investment beyond the pandemic, and recent data suggests that ESG-related funds outperformed the markets over the first quarter of 2020. The pandemic has acted as a wake-up call for businesses, highlighting the need for embedding ESG into their corporate strategy for managing risks and returns, while ensuring that we build resilient systems for long-term value creation. This has offered an opportunity for the financial sector to manage risks, improve returns and build a resilient economy for crisis-resilient long-term value creation and ESG funds have outperformed classic indices, and ESG factors emerged as major indicators of resilience in this crisis.
Financial services firms are now feeling pressure from their customers and the public at large. Customers want a firm that reflects their views and beliefs, with many younger investors claiming they are choosing their financial institutions based on their ESG credentials.
How Data Science and ML enables ESG to make a real-world impact
UK businesses lost over £6.2 million to cyber scams, with a 31% increase in cases during the height of the pandemic. Recent S&P research found that as cyber-attacks continue to increase in frequency and severity, cybersecurity is highlighted as a top governance concern within ESG considerations. Financial leaders must be reminded that ESG requires businesses to ensure data security and customer privacy is upheld. In a world of relentless cybercriminals and ransomware threats, protecting confidential data is not only paramount but also a huge and challenging responsibility.
This is where the cloud can optimise business security and help financial institutions meet ESG requirements. The key element of the cloud that helps financial firms meet ESG standards is the integration of Data Science (DS) into their network. With the ability to process, analyse and learn from a vast amount of data, DS is primed to help solve some of the most pressing issues in Financial Services. The advances in Machine Learning (ML) and the rate at which DS is deployed across daily applications mean that the emerging economy of the future can optimise on transparency, accountability, and impartiality to create trust.
This is important for IT leaders because DS and ML provide the foundation for strong cyber resilience and cybersecurity. In a world where data is the currency of civilisation, these aspects are non-negotiable in developing and scaling future-proof businesses. As the threat from cyber actors is universal, the global economy requires great cooperation and collaboration in addressing key security threats.
A focus on ESG compliance
There is increasing pressure from lawmakers, regulators, employees, and activists on organisations across all sectors to recognise and adhere to ESG requirements and report performance against ESG metrics. Therefore, it is more important than ever for companies to have comprehensive ESG policies in place.
Financial institutions must ensure that an effective and comprehensive compliance strategy is in place is from the outset. This strategy should encompass existing, and forthcoming legislature such as the implications of Brexit and the pandemic, the Sustainable Finance Disclosure Regulation and the Taxonomy Regulation, the Modern Slavery Act, and the anticipated legislation signposted recently by the UK Task Force on Climate-Related Financial Disclosure. Similarly, the much-anticipated corporate governance reforms in the UK, announced by UK Business Secretary Kwasi Kwarteng MP in early 2021, will affect ESG, on reporting obligations in this area, and the price of failure to comply. The significance of these reforms for company executives is critical. Internally, these non-traditional, non-financial factors will affect decisions on executive remuneration. Externally, companies’ behaviours in those areas will be scrutinised and challenged.
The compliance landscape is becoming increasingly technical and multi-jurisdictional. Organisations can no longer neglect the repercussions of cyber breaches by simply sanctioning and removing certain individuals within their organisations. They must instead build a company culture and infrastructure based around ESG compliance.