18 minute read
aI and esg
Is AI the answer for ESG?
With environmental, social and corporate governance now on every business agenda, can artificial intelligence and technology finally deliver a universal ESG measurement solution?
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Words:
David Stirling
ONE THING IS absolutely clear: ESG investing has soared in popularity in recent years as the world faces up to the pressing challenges of climate change and social issues such as racial justice.
According to figures from PwC, asset managers across the world are expected to increase their ESG-related assets under management from $18.4trn in 2021 to $33.9trn by 2026.
Driving part of this growth has been the steady adoption of ESG reporting regulations and measurement metrics. These are aimed at making companies and those in the finance sector reflect on their ESG impacts and highlight the risks both for themselves and their suppliers.
They are also targeted at helping investors to make better informed decisions on when and where to allocate capital by analysing the data produced from the reporting.
These regulations include the European Union’s Corporate Sustainability Reporting Directive, requiring companies to disclose information on non-financial issues such as human rights and clients’ portfolios and assets might look like against the global standard of the Task Force on Climate-Related Financial Disclosures (TCFD).
Neither do they know what portfolio emissions metrics might be consistent with the guidance set by regulators in the Channel Islands.
“We had the European Central Bank earlier in 2022 complaining that only 30% of the banks it regulates were able to produce data on financed CO2 emissions,” Sloan adds. “That’s the absolute central metric in TCFD and it wasn’t there.
“There are an awful lot of mismatches between rhetoric and reality out there and so much data you can be measuring.”
environmental impacts. Another is the Sustainable Finance Disclosure Regulation, which requires asset managers to make mandatory disclosures on ESG factors integrated at an entity and product level.
But industry experts believe much more can be done to create consistent and accurate analysis and reporting – to drive even more investor interest.
Data is at the heart of this. “The main issue for the industry right now is the quality of the ESG data coming through, a lack of alignment between the different data providers and the huge number of metrics being asked by different regulatory frameworks,” says Dasha Kuts, Senior Manager at Ogier Global’s Sustainable Investment Consulting team.
“There are inconsistencies in definitions around ESG metrics, with some, such as Scope 3 emissions, requiring lengthy, in-depth analysis of supply chains.
“Good governance scores are frequently missing or differently defined by the various ESG vendor providers. As a result, it is hard to set benchmarks to measure improvements and to define what good and bad looks like.”
AROUND THE GARDEN PATH
Andy Sloan, Managing Director of Netherite & Grunweldt, which provides climate risk advisory services in the Channel Islands, adds: “When it comes to reporting and risk, most firms I speak to have been led around the garden path about needing an airy-fairy list of ESG metrics that add precious little value to the investment or risk management process.
“It’s policymakers dreaming up reporting requirements for which the data coverage just doesn’t exist.”
Those same firms, he says, are also “frankly clueless” as to what climate risk reporting requirements on their
PROCESS IMPROVEMENT
Sloan believes the use of AI in ESG could improve the process and ensure more actionable and available data for investors.
Over the past six months, he has been working with global software provider Kiya.ai to develop a cloud-based reporting tool for climate risk and climate metrics for the types of financial services firms found in the Channel Islands – particularly fiduciaries, fund administrators and insurers.
A central hypothesis of the reporting is that knowledge of the temperature alignment of portfolios is key to helping firms and clients develop an intuitive understanding of the climate risk issue and its potential financial impact.
To that end, it has made reporting of the implied temperature rise of assets and portfolios an integral component of the reporting tool.
“The implied temperature rise is, as it kind of says on the tin, the future temperature rise of the planet if all physical ▼
assets emitted carbon at the same intensity of the asset (or portfolio) in question.
“Clients might not know if a weighted average carbon intensity of 430 tons of greenhouse gases per million dollars of revenue is a good or bad asset to have in the portfolio. But they will know that a 2º future-aligned asset is better to have in the portfolio than one aligned with a 4º future,” Sloan says.
“Transparent, robust and simple… the implied temperature rise provides a single easy-to-understand metric that encapsulates everything one needs to know for a first-pass, informed discussion of climate risk at board level.”
The data is taken by Kiya either through APIs or direct bulk uploads from Excel or bulk transfers from corporates’ software or physical systems. Its functionality includes measuring against global and national benchmarks and extends to an estimation of requirements under the Science Based Targets initiative.
“It’s built with high-net-worth individuals in mind who have a mixture of some physical assets and holdings in unlisted funds. In addition, it helps private equity and the banking sector, which need to calculate and assess climate risks when they are lending,” Sloan says.
“But the real boon for corporate governance is the auto-generated risk report that measures separately against five different elements of climate risk: asset risk, transition risk, concentration risk, event risk and jurisdictional risk.
“We can give an assessment of risks inherent in portfolios based on the available data. The next expansion of the tool will be looking at the emissions of listed funds and corporates. We can scrape and pull off the data from public resources on the web.”
Transparent, robust and simple… the implied temperature rise provides a single easy-to-understand metric for a boardlevel discussion
AUTOMATIC POWER
Sloan says it is the automatic nature of the AI process that can help speed up and boost the quality of reporting. “AI can’t pluck data out of the atmosphere. It has to be collated and pushed onto a system in the first place. There has to be a primary data source inputted manually – and really, as an investor, do you have the time to go and find it?” he questions.
“We can pull that data into our system automatically and then automatically upload it for investors, to help with their calculations.”
Another example of AI and ESG is GreenWatch – a team of sustainable finance experts from academia and industry – which has developed a tool for the finance sector to assess and monitor the authenticity of green claims made by companies on their websites and/or in their publications/statements.
It provides data on greenhouse gas performance and sustainability claims, where corporate statements related to sustainability leaderships are collected, with a special focus on claims made by senior executives.
Using AI, the statements promoting green credentials are rated in their boldness. These ratings are then verified by the team.
Greenhouse gas data, as publicly reported by each company, is also collated and performance categorised based on disclosure level, completeness and absolute emission reduction.
The final assessment contrasts the boldness of the green claims and the greenhouse gas performance of each firm to determine who “talks the talk and walks the walk on climate change”.
AI is clearly making strides in helping investors and others in the financial sector begin to make sense of the ever-increasing volumes of ESG-related data.
But challenges in its development remain, such as squaring the circle over the large carbon footprint caused by data storage and processing, and a dearth of both tech and data understanding among senior managers.
Kuts also raises concerns around machine learning algorithms and that certain ethical bias can emerge because they are ultimately created by human beings.
But the primary concern threads back to the lack of quality ESG data for AI to work with. “Because this is so questionable, the use of AI is limited,” Kuts says. “We need better ESG-quality data for AI to present any meaningful insights.”
Sloan agrees that data can be ‘patchy’ given the reliance on manual uploading, particularly with financial CO2 emissions.
“Whether presenting to boards on climate risk in terms of reporting requirements coming down the track in the Channel Islands or just to the public, I try to concentrate minds on what’s needed and what’s nice – but definitely not the nonsense that’s being peddled by numerous self-interested parties,” he says.
“We’ve just gone through a ‘money for nothing’ decade. Now, capital costs – the functionality has to be worth it – and we’ll see a paring down into more proportionate reporting.
“We’ll get the necessity, which will be vital in dealing with the urgency around climate change. It is real and it is now.” n
NFTs’ relationship with intellectual property
Sophie Peat, Partner, Intellectual Property, at Ogier, sets out five things you need to know about non-fungible tokens and intellectual property
NFTs (NON-FUNGIBLE TOKENS) offer
new earning potential for those in the creator economy. Interest surged during the pandemic, and investment in NFTs and the metaverse continues to increase.
NFTs are digital assets based on computer code with a unique identifier that creates proof of title to underlying digital or physical assets, such as artwork, music or other creative works. Similar to a digital certificate of authenticity or deed of title, NFTs can be used to prove ownership and authenticity of an asset as evidenced by an immutable, cryptographically secured record on a blockchain or other distributed ledger technology. They can be non-fungible and non-interchangeable.
Given the relationship between NFTs and creative assets, one must be alive to the interplay of intellectual property (IP) and NFTs. Here are some points to consider.
1. NFTS ARE NOT EQUAL TO IP RIGHTS
NFTs are assets but are not equal to the underlying digital or physical asset they represent, nor any intellectual property rights therein. Buyers need to carefully review the terms and conditions of sale to understand what they are buying and what they can do with it. For example, will IP rights in the underlying asset be part of the NFT sale? This is rare, and there must be express written and signed assignment of the relevant rights for the IP to be effectively transferred.
On the other hand, and more commonly, if the IP rights will be licensed, what is the scope of the licence? The answers will
Buyers must carefully review the terms of sale to understand what they are buying
determine how the underlying asset can be exploited and how much the buyer is willing to pay.
2. COUNTERFEITS: DO YOUR DUE DILIGENCE
Once you understand precisely what is being sold, check that the seller actually has the right to sell the asset(s). Particularly if the asset is a copyright work, such as a digital piece of art or a brand-named digital handbag, you should check the chain of title to ensure that the original creator or IP owner authorised the NFT’s minting in the first place.
If not, you could be purchasing an NFT for a counterfeit. To reduce this risk, buy through a reputable NFT marketplace and conduct research into the seller, including a review of their account, online feedback and associated social media.
Other indicators of a counterfeit could be the price point or its availability in other marketplaces. You can also inspect the metadata and any digital certificate issued via a reputable blockchain explorer.
3. YOUR EXISTING TRADEMARK RIGHTS MAY NOT EXTEND TO NFTS OR VIRTUAL GOODS AND SERVICES
If you are a brand owner looking to protect or exploit your trademark in the digital world, you should review your portfolio and check the goods and services descriptions provide adequate protection.
For example, do they specify the relevant digital goods that may be authenticated by NFTs and/or downloadable virtual goods or services that you may offer now or in future? You may also want to register new trademarks for specific digital brands.
4. CREATING/MINTING NEW NFTS FOR COPYRIGHT WORKS
If you wish to mint an NFT for a digital asset you have created and in which copyright subsists (such as a digital artwork), you will likely want to retain ownership of the copyright, as you would for a physical work.
Consider whether you wish to allow the buyer the right to display the artwork for personal, non-commercial use only and in the NFT marketplace for resale purposes, or whether you will allow for any commercial use of the work. This may include creating adaptations or derivative works of digital art from the original.
If you are considering the latter, think about the scope of the licence and how compliance will be monitored and enforced if there is a breach, and in which jurisdiction that will be.
5. IMPACT ON THE VALUE AND REPUTATION OF YOUR BRAND
Consumers are more informed and demanding than ever and seek to purchase from brands that share their personal values.
A number of factors can affect the value and reputation of a brand in the NFT space, but one that receives an increasing degree of media attention concerns the carbon footprint associated with the minting and selling of NFTs on the blockchain.
Consumers are increasingly scrutinising brands and holding them to account – and if sustainability promises conflict with working practices, this can have an adverse impact on the brand.
Brands that address these issues transparently, however, are likely to have greater longevity in the digital world. n
FIND OUT MORE
For further information, contact Sophie Peat, Partner at Ogier in the Cayman Islands. Email: sophie.peat@ogier.com
The considerations and suggestions above do not constitute legal advice. Developers, issuers and market participants should obtain their own unique legal advice before undertaking any NFT-related project.
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EWG – THE ALTERNATIVE
DISRUPT.
POSITIVELY.
EWG’s innovative, digital-by-default alternative to traditional banking provides international payment solutions and multi-currency account management services with competitive fees, 24-hr onboarding, and responsive client service; we understand what clients need most from a trusted digital banking partner.
Access your account securely, anytime, anywhere through the EWG APP or integrate your business systems with the EWG API; the tech backbone of our cross-border payment engine.
We can solve your banking challenges and help you work more effectively. Please call EWG on +44 (0) 1534 601212 or visit ewggroup.com
Composable banking: treating change as a constant
Alan Yates, Director at EWG, shares a roadmap to a future of digital banking that truly meets clients’ needs
TODAY, WE ALL expect the same level of digital convenience from our banking service providers as we enjoy from the e-commerce sectors, subscription-based streaming services and telecommunications. If Amazon can deliver a seamless end-toend service – where we know exactly, through real-time reporting, where our ordered items are, anywhere in the world – why can’t we enjoy the same level of service delivered seamlessly from our banking service provider?
Regulators across the world also agree, as we see more banking providers such as EWG entering the digital marketplace. These positive disruptors are equipped with the technologies and the mindset to deliver products and services to the market, at speed, designed around the needs of the end customer or client, not the other way around.
We take time to listen to what our clients are saying, fully understand the challenges they face and then develop a technologydriven solution that takes that pain away.
It’s simple: along with other challenger banks, we recognise the challenges and then apply our resources and technology to continually evolve and develop our digital banking platform to meet the ever-changing needs faced by our clients.
EWG is not a traditional bank adapting dislocated and legacy banking platform systems that have been developed and evolved since the 1990s. EWG’s DNA is embedded through a composable banking platform approach.
WHAT IS COMPOSABLE BANKING?
So what makes EWG’s platform different from traditional banking providers? Cloud banking platform developer Mambu says: “Composable banking is an approach to design and deliver financial services that treat change as a constant based on the rapid and flexible assembly of independent, best-for-purpose platform systems.”
A recent Deloitte report into composable banking said: ‘The future of banking is a moving target’. And how do we hit that target? By designing and delivering a composable banking solution that fully meets our clients’ needs and exceeds our clients’ expectations.
Composable banking platforms can be brought to market and evolve at speed. They are incredibly flexible and scalable and the client journey can be highly personalised and surprisingly enjoyable. Using EWG APIs, they bring together the best of each component and provide a future-proofed, constantly evolving, costeffective digital banking alternative.
KEEPING UP WITH THE PACE OF CHANGE
Traditionally, change in the banking sector has been slow. Big bang transformations can take so much time to develop that they can ultimately deliver outdated products or services that clients simply do not want.
With the plug and play approach of composable banking, that dynamic of slow transformation is banished to the past.
Through the use of EWG APIs, composable banking platforms don’t require transformation but constant technological improvement to components that can take place in months, not years.
As a digital banking partner to the professional fiduciary, corporate and fund sectors, we understand our clients’ sectors intimately. Through constant dialogue, we shape our programme of technology development, whether it’s self-service automation for client account-opening through the client onboarding process or creating banking ecosystems through our API integration to client host systems.
And because EWG’s platform is a composable banking solution, our updates don’t take years to implement.
WHY IS COMPOSABLE SO AGILE?
Composable banking should not be mistaken for modular banking. Modular banking platforms are based on a core traditional banking system that can be extended by adding separate modules. The choice of these modules will be limited by the provider, and the systems are neither open nor flexible.
Although this modular approach is widely accepted within digital banking, it’s definitely not client led and therefore the ability to keep pace with the evolving needs of those clients is somewhat lost.
Composable banking consists of a core banking engine that coordinates a set of independent components through open APIs. This means the functionality can be extended by adding or exchanging components. And because clients have the option to choose those components, they can integrate them with their host systems.
The result is a solution that can be completely flexible, constantly evolving and future-proofed, and can address the specific challenges or bespoke requirements of individual clients. It’s as far removed from the traditional ‘one size fits all’ as you can get.
WHAT DOES THIS MEAN FOR YOU?
At EWG, we build and continually test our client value propositions. Our vision is simple: make digital banking an enjoyable experience for our end clients. Our team achieves this by creating a great platform experience while partnering with our clients to deepen the relationships that transform how clients transact.
Uniquely, all our services can be accessed via one platform, using one log-in, whether you want to make cross-border payments, screen inbound and outbound client funds, manage multiple currency accounts or even run an international payroll.
EWG is able to onboard clients within 24 hours and integrate our platform into existing in-house client host systems using our open APIs. This will then automate bespoke reporting, creating cost savings and efficiencies.
EWG is at the forefront and leading the change in the offshore corporate services banking landscape. We are creating a new way to work – via client-led composable banking. n
FIND OUT MORE
EWG is a leader in fintech and a specialist digital banking partner for the fiduciary, corporate and fund services sectors. Our cloud-based dashboard interface enables third-party business software to communicate with us and share data securely and in real time. Our platform enables the efficient and cost-effective management of international payments and currency management. EWG now services more than 200 jurisdictions.
For further details, contact Alan Yates, Director, EWG. Tel: 01534 608022 Email: alan.yates@ewggroup.com
