The integration of deep technologies will help financial institutions meet ESG goals and thrive in future economies.
The views and opinions expressed in this article are those of the author.
The intensifying global challenges of climate change, inequality, human rights abuses and social injustice are felt by us all. The need for urgent and rapid change is widely accepted, as is the fact that all of us – governments, business and civil society – have a role to play in achieving a better future.
Ahead of world leaders gathering in Glasgow for COP 26, the 26th United Nations Climate Change conference, we are reminded that the framework for change is set at an inter-governmental level.
As with the Paris Climate Accords and UN Sustainable Development Goals, which set out crucial targets for climate action, zero poverty and achieving gender equality; these frameworks come with the hope, and no little expectation, that businesses will step up to the challenge of achieving positive outcomes for the planet and its people.
ESG standards at the core of business
At the nexus of all this sits the financial industry. Certainly, the leaders at COP 26 will have their sights trained on the role that financial institutions can and must play in unleashing the trillions of dollars in private and public sector finance required to secure global net zero emissions.
Beyond that, the financial industry has significant leverage over all commerce in the form of environmental, social, and governance (ESG) standards – and the investment decisions those standards drive.
Essentially a value proposition that assesses any company’s ability to safeguard and sustain long-term success through measures beyond their ability to generate profit and shareholder returns, ESG standards have the potential to influence the way in which any company thinks, organises, operates and behaves.
In traditional business thinking, ESG has been considered separate from the ‘core’ functions of a business; an important adjunct to investor relations, yet still too often regarded as the means to present an organisation’s ESG credentials rather than an opportunity to adopt new ways of working.
Yet, with a new line of investor thinking suggesting that those companies with the best ESG credentials are most strongly positioned to react to the exponential change they now face, there is an opportunity to put ESG at the heart of companies’ transformation initiatives.
The financial industry is exceptionally well placed to drive this change. By completing and sustaining the shift from physical products and services to digital, and by ensuring that the companies it works with adopt clean technologies, the financial industry can help to reverse negative environmental and social impact while at the same time realising value for companies and investors.
Technology enables ESG in the financial sector
Blockchain and other such distributed ledger technologies have a key role to play in validating companies’ ESG credentials in the financial sector and beyond.
Modern supply chains are complex, with materials, manufacturing and services switching back and forth between multiple locations. For a lender looking to decide whether to finance a company, it is incredibly challenging to track and analyse whether the company is ESG compliant.
Blockchain automates the process, allowing an organisation to transparently trace materials and processes from source to final product – and investors to favour those companies that offer the greatest chances of sustainable value creation.
Machine learning data analytics software can also help financial institutions to identify sustainable investments that generate long-term value. Virtually every global bank has made some form of large-scale commitment toward sustainable investments in recent years.
However, this understandably cannot come to the detriment of their operations as a value-generating business. As a result, thousands of man hours are spent researching viable ESG compliant investments.
Machine learning software could be trained to analyse primary and secondary sources of data to identify investments at a fraction of the time that it takes at present.
More consumers shifting from physical to digital
In retail financial services, there is a strong argument for encouraging consumers to continue the shift away from physical cards and banknotes and to adopt rapidly advancing digital alternatives – from payment services that leverage biometric identification and tokenisation, to cryptocurrencies such as Bitcoin and Ethereum as they optimise to utilise less energy-intensive security systems.
The Covid pandemic showed how readily consumers can make this shift from physical to digital. In 2020, the UK’s largest cash payment network, Link, saw the number of ATM transactions fall by 43 per cent and the value of cash withdrawn fall by 36 per cent.
Meanwhile, contactless payments and payments made with digital devices are increasing. UK Finance research showed that the number of contactless payments made in the UK increased by 12 per cent to 9.6 billion payments last year.
Standing at a crossroads
Rapid action is needed to combat the challenges of climate crisis and social injustice. ESG is an opportunity to develop, coordinate, implement and monitor creative responses to pressing global issues.
Implementing this type of thinking into an organisation’s transformation will be dependent on its usage of technology, and by more effectively implementing digital solutions into their very structure, companies are able to close the gap between what consumers and governments expect, and what traditional business models can deliver.
- Nigel Vaz is the CEO of technology consultancy, Publicis Sapient