How Can Fintech Help with ESG Integration?

Sustainable fintech, Green car loans, energy efficiency mortgages, alternative energy venture capital, eco-savings deposits, and “green” credit cards are just a few of the innovative, “green” financial products currently available worldwide. Environmental risks and opportunities abound in today’s world, along with the options for reconciling environmental concerns with lending and financing arrangements.

Previously, traditional banks did not practice “green” banking up until a few years ago. Apart from that they never sought active investment opportunities in environmentally friendly sectors or businesses. This gave rise to green finance and green financial products and services, not just among smaller alternative and cooperative banks, but also among diversified financial service providers, asset management firms, and insurance firms. Although the stated motivations for increasing environmental products may differ (for example, to improve long-term growth prospects or the sustainability principles on which a company is founded), the growth, variation, and innovation behind such developments indicate that we are in the midst of a promising drive toward “green” financial product development into mainstream banking. Banks’ strategies and actions are already shifting towards sustainability. A growing number of financial institutions are directing their resources and lending power toward preventing environmental degradation as well as promoting sustainable consumer behaviour and decision-making. Some of the main factors currently driving this marriage between banking and sustainability are lender liability, borrowers’ ability to meet financial obligations, ecological deficits, and business opportunities. Furthermore, this relationship is being strengthened by a variety of developments, both internal and external to financial institutions’ operations. The wide range of internal opportunities to address sustainability in a bank’s operations, from corporate policy to energy reduction measures, demonstrates that addressing environmental issues can be a logical extension of the sector’s general business. Organizational policy, practice, and services; supply chain choices and demands; business development; reporting; public policy outreach; stakeholder engagement; research collaboration with other governmental and non-governmental entities; and institutional donations or other philanthropic efforts are all possible areas and practices where sustainability issues may arise. According to a 1997 study, a number of European UNEP-FI banks had set up environmental departments and began designing environmentally friendly products as well as providing environmental risk assessment services. As environmental risks and opportunities become more established elements in internal banking policies and practices, these types of sustainability initiatives are likely to grow.

FinTechs have always been defined by their ability to both innovate and contribute to long-term sustainability. FinTechs’ role in assisting policy formulations aimed at transitioning to a low-carbon world is well understood by policymakers and regulators.

Finance’s role in any economy positions it well to lead the transition to a low-carbon, more sustainable world. Furthermore, following the release of the latest IPCC (Intergovernmental Panel on Climate Change) report, dubbed “a code red for humanity,” it has become even more critical to ensure the best possible allocation of capital (estimated at $6-$7 trillion per year) to this transition.

The recent United Nations Climate Change Conference in Glasgow not only demonstrated progress on the historic Paris Agreement of 2015 but also highlighted the challenges ahead on the long road to achieving the net-zero emissions goal by 2050. Every country, particularly the larger ones, must make a significant investment.

For those looking to build their own platform, the following framework — which includes structures and processes to ensure the reliability and consistency of data analysis and decision-making — can be useful. The following five pillars support this framework:

  1. The current state of ESG data is being examined. Determine what data is currently available and whether there are any data gaps that are relevant to ESG standards. Determine a method for gathering the remaining data needed to get a full picture of each company in a firm’s portfolio.
  2. Creating an easily accessible data center. A data hub gathers information from a variety of sources so that it can be accessed, edited, and analysed by everyone in the organisation. The data portfolio, analysis, and repository of an investment firm are kept in a data hub. Data hubs that are hosted in the cloud offer more flexibility and convenience.
  3. Adding an extra layer of intelligence Using artificial intelligence and data analysis tools, investment firms will be able to better manage and extract insights from their ESG data. Specific lines of business can create individual data models to enable more tailored decision-making.
  4. Developing a reporting capability for environmental, social, and governance (ESG). Customers demand complete transparency in order to ensure that ESG standards are adhered to. You must develop reporting, disclosure, and governance processes to achieve that level of trust, compliance, and transparency.
  5. On the front end, data visualisation tools are used. Data visualisation tools such as charts, maps, and graphs allow us to quickly ingest large amounts of data and understand trends, patterns, and relationships. This is useful for managers who need to quickly assess the ESG status of companies in their portfolio.

Firms can set themselves apart by conducting research, offering advice, and tracking the ESG performance of their client’s portfolios through smarter, more informed, data-driven decision-making.

Firms that use the right business architecture and fintech tools to integrate ESG into their financial advice management are more likely to earn their clients’ trust and convert that trust into long-term relationships.