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Today’s global financial leaders, from central banks to financial regulators, are increasingly focusing on issues surrounding climate change and sustainability. There has also been a change in the attitude of policy makers and legislators who now believe that the financial system should play a key role in companies taking the necessary steps to move the economy towards net-zero emissions.
The threat of climate change may be the only threat right now on both the global and individual economies. However, if it begins to take the form of climate risk, it will have a significant impact on property values, especially with the current understanding of climate risk exposure in various industries – and may result in significant reductions in property prices. It’s time for companies to unravel key insights on how to unlock ESG data and how to use AI technology to redirect capital to carbon-intensive green investment.
1. Regulatory environment
Tools developed to cope with the global financial crisis are now being used by regulators to address the problem of climate risk management and the development of green finance. With many of these first in progress, the industry will soon see an influx of ESG-related practices and discretionary requirements – followed by new reporting and management requirements, including monitoring and supervision.
While organizations may have questions about the implications and implications of these incoming rules and regulations, one thing is clear: it is time to move on from adopting ESG practices. Businesses need to have the ability to prove these efforts. In fact, “following the unprecedented market and policy momentum behind the ESG in 2021, investors, corporate boards and government leaders have raised expectations of progress on climate promises in 2022,” according to recent reports.
As financial institutions take practical steps to implement sustainability in their services and activities, companies must adhere to it – especially with regard to sustainable corporate practices that are increasingly attracting the attention of investors and acquirers. That said, many companies are moving cautiously to avoid allegations of greenwashing, leaving many businesses reluctant to pursue ESG plans. This is often due to the lack of a clear path ahead or the fear of “not getting it right” in the eyes of the people. It’s more than just adopting a new business model and investment strategy; It begins with an analysis of back-office activity and an assessment of the impact of climate risk on an existing business.
2. The important role of data
In the data-driven world, it is not surprising that data plays an essential role in measuring the impact of the transition on financing and asset values. Sustainability data at the production level includes specific environmental impacts and financial investment outcomes, such as equities, bonds, loans and derivatives. This is the key to evaluating climate risk exposure, informing green investment decisions and securing capital flows. While most companies have an abundance of data, the main challenge they face is to achieve consistent, standardized, and useful product-level data.
What makes this so challenging? Well, as much as 90% of enterprise data is unstructured, making that data useless for most companies. It can do this by unlocking the hidden value of the data Then Acts as an input for pricing engines, risk management tools and more – a component of data that is critical to the financial services industry. But to do that, companies must first lay the foundation for ESG data and take advantage of the right tools and technology that have the power to unlock the value of data.
3. The foundation of ESG data
In addition to the essential (and somewhat explicit) role of data in this area, it is important to understand the basics for ESG data. The insights hidden in these data provide information on key financial decisions and the need for these data is driven by an uncertain regulatory environment and established in industry-lead standardization efforts. Around the world, regulators are setting standards for product-level sustainability data through regulations such as the European Classification for Sustainable Activities, the UK’s Green Classification to help combat green washing, and recent US SEC proposals to support mandatory climate advertising.
In addition to the regulatory environment, private institutions are also developing industry standards and best practices – proving that green initiatives play increasingly important roles in financing and funding opportunities. For example, Equatorial Guidelines are a guide to help lenders and other financial services companies better understand the impact of their activities and climate risk when financing a project.
What’s more, 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 adopting sustainable practices and establishing standards for measuring those efforts. These associations are at the forefront of defining and classifying these ESG-related initiatives as well as setting standards for industry-wide best practices.
4. The advantage of technology
With an understanding of the importance of data associated with the foundation that runs ESG data, organizations should also take advantage of technology to unlock the value of data. Financial institutions, lenders and issuers are increasingly incorporating legal and contract documentation into the tools that govern the financial instruments and trades in which they enter – essentially ESG data promotes modern lending and investment.
In anticipation of a regulatory framework in the near future, it is important for both financial services companies and corporations to adopt best practices, principles and standards developed by industry leaders – and invest in climate tech that powers the data-driven ESG proposal. To achieve this, businesses must analyze their contracts and documents and actively incorporate ESG-related data points into key business decisions.
Technology offers significant benefits because data that measures sustainability impacts and assesses climate risk remain in agreement and documentation. Whether these documents are old or new, organizations need a way to quickly extract data and convert it into effective metrics and reports that can be used to make decisions. If companies wait to start this work until the rules are enforced, they will be at a disadvantage. With thousands of documents to analyze, companies should take advantage of the power of AI technology to extract, classify, and interpret the data trapped in their documents – enabling smart business decisions, eliminating manual processing, and optimizing data flow quickly and accurately.
As environmental, social and governance (ESG) issues continue to guide the executive agenda, it is equally important for both financial services companies and corporations to understand the evolving regulatory landscape, the role of data in measuring green initiatives, and the basics of data. ESG leverages efforts and AI technology to better inform lending and investment decisions.
Lewis Z. Liu, Ph.D. No. is co-founder and CEO Eigen Technologies,
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