by Daron Pearce, founder and CEO of Daron Pearce Associates

In fact, technology is not just critical, technology is the answer.

It can support ESG investment decisions with accurate reporting, drive sustainable IT, provide carbon neutral technologies, and give investors opportunities to create a path to net zero with fully transparent outcomes.

Companies who don't embrace ESG reporting technologies risk losing the fundamental trust of their investors.

The European Banking Authority (EBA) recently published binding standards on Pillar 3 disclosures on ESG risks. These will enable stakeholders to assess the climate change, social and governance risks that impact an organisation's balance sheet.

In November 2021, during COP26, a new International Sustainability Standards Board (ISSB) was announced. It will create sustainability disclosure standards to guide investment decisions and consolidate existing policies to create a gold standard.

Reinhard Dotzlaw, Partner and Global IFRS Leader at KMPG, says:

"The creation of globally consistent and transparent sustainability disclosure standards focused on long-term value creation will strengthen our capital markets by helping investors make better decisions. The hope now is that jurisdictions globally get behind the new ISSB."

Climate tech is part of a larger movement that, driven by the rise of ESG, will be accompanied by reporting technologies which enforce robust regulation and support long-term interest. ESG is now centre stage and businesses, investors and governments are using it to link their decisions to measurable outcomes.

What ESG also shows is that technology is part of a broader movement that enables social and environmental change. So, how can technology support a broader movement towards regulation and standards?

Accurate Reporting Reduces Investment Risk

Most companies know they need better data to monitor the outcomes of their ESG initiatives. But existing data is undermined by a lack of regulation and 82% of investors believe that companies will not comply with ESG reporting regulations.

That's where technology comes in. When companies can measure their environmental and social impact, they can show that their plan is working and boost credibility with investors.

Unsurprisingly, technology companies are stepping into the gap in a big way.

ServiceNow has developed a new integrated ESG solution to help companies comply with existing and proposed regulations. Google Cloud has launched Carbon Footprint with a transparent calculation methodology for verification against industry standards.

Stephen Everard, Chief Executive Officer at Goal Group, a global fintech specialist in withholding tax reclamation and securities class action recovery services, says:

“Fund managers and institutional investors have a duty to maximise their investment returns including efficient and cost-effective reclamation of overseas income from foreign tax authorities which until recently was an expensive and uncertain process. In an environment where ESG is central to investment credibility, technology and software solutions can only be viable where they enhance returns whilst also being fully ESG compliant."

Taking ESG data seriously means leveraging the latest developments in Artificial Intelligence, Natural Language Processing and Blockchain. Companies can leverage Artificial Intelligence and Natural Language Processing to automatically create real-time reports. Investment managers can then analyse how policies are impacting their ESG rating from the outset, making it easier to optimise the outcomes.

But technology can also provide unexpected insights.

A recent study by MarketPsych, a company that uses Natural Language Processing to analyse sentiment data from news and social media, linked stock price performance to workplace sentiment:

"Month-after-month, companies with happier employees outperform their peers and companies with unhappy employees underperform. Such data can also be used for risk management — to avoid companies performing poorly on ESG metrics."

The recognition that new technologies can transform the ESG landscape is not new. In 2018, a World Economic Forum report argued that blockchain could transform reporting by helping companies to illustrate their performance and enabling investors to make informed decisions:

"This could drive a new wave of accountability and action, as this information filters up to board-level managers and provides them with a more complete picture for managing risk and reward profiles."

Put simply, even as ESG data is becoming more fragmented, technology can provide auditable records for insight and visibility.

ESG Investment Opportunities & Sustainable IT Strategy

Fund managers need to evaluate how ESG funds differentiate themselves.

This means leveraging the latest developments in Artificial Intelligence to allow investors to account for environmental, social and governance risks and opportunities.

S&P Global sees this as a key shift in the issue of ESG data:

"Investment managers are coming under increasing pressure to measure ESG criteria in their portfolios. However, a lack of data is making it hard for banks to assess long-term risks and rewards. Here, AI is the answer: technologies will filter essential data that investors currently lack, acting as the catalyst for sustainable investing at scale."

Terence Tse, Co-Founder at Nexus Frontier Tech identifies three core advantages of this technology:

• Real-time signals can provide early warnings of risk for ratings providers
• Companies can be sure that their ESG compliant activities will be captured into their ratings
• Investors will have high quality ESG data to drive their investment strategies

As this technology advances (it's not there yet), investors will be able to use shared visibility on data to make confident investment decisions.

It follows then that a robust commitment to ESG must also include working with your Chief Technology Officer to simultaneously reduce the environment impact of IT services so as to capitalise on these advances.

Research shows that 50% of firms have an enterprise sustainability strategy, but only 18% have well defined goals and target timelines.

Capgemini identifies three critical steps to a sustainable IT strategy:

• Set the foundations with a qualitative and quantitative diagnostic assessment and an IT strategy that aligns with the organisational sustainability strategy.
• Define governance and create a dedicated sustainable IT team with support from the C-suite.
• Operationalise sustainable IT initiatives and establish sustainability as the core foundation of software architecture.

Sustainable IT strategies can also drive business goals. Kiran Bhogal, CEO of JPSB, a specialist IT consultancy providing services to the investment management community, makes a strong case for the competitive advantages of an organisational approach:

"Companies that embed sustainability into their IT strategy benefit from reduced costs and increased ESG scores. But they also achieve stronger brand value and competitive advantage because the market is increasingly driven by investor demands for sustainable businesses. They can also then potentially attract better talent. The advantages of IT sustainability massively outweigh the short- and longer-term costs."

Linking KPI’s to enterprise sustainability goals reinforces the connection with a data driven ESG enabled technology strategy.

In fact, further research states that common sustainability practices are now a necessity rather than a strategic advantage. In order to differentiate, investment managers need to prepare to introduce sustainability measures that cannot be easily met by competitors.