Being able to identify and fund sustainable investments will be central to reaching net zero. But problems with data consistency and frameworks make it difficult for investors to measure the true cost of climate change. So, can fintech play a role in allocating capital to ESG investment opportunities?
Financial markets, when they work well:
- select the best long-term investments
- manage risk, and
- oversee how firms operate.
If the world is to reach net zero, the markets will need to channel investments into the firms – and technologies – that enable the transition to a globally fair, zero-carbon economy.
That means considering all the important social, environmental and governance risks (ESG) when allocating funds.
And it’s not a small ask – as discussion at the Climate Risk & Green Finance Regulatory Forum in February made clear.
Knowing what climate change costs
For a long time, concern about global warning was dismissed as scaremongering, or hippiedom. Climate campaigners – to repurpose a quote from Oscar Wilde – were people who “see an absurd value in everything and don’t know the market price of a single thing”.
All that mattered for many investors was the biggest short-term financial return. That has changed.
Oliver Gregson is Head of the Private Bank UK & Ireland at JP Morgan. Speaking at the Forum, he said, “Increasingly people are coming around to the view that this is a better way to invest to get a better risk-adjusted return. But there are a lot of growing pains.”
Gregson pointed to the problems around:
- data consistency
- data frameworks, and
- greenwashing.
Essentially, to combat climate change, financial markets need to be able to put a true cost on it. The question is how.
Material data and trust in the markets
Eric Usher, Head of the UNEP Finance Initiative, said financial services are not at present “truly” acting on what is “material” to climate change.
There are a number of reasons for that, including regulation and short-termism, but a particular problem is the lack of ‘material’ information.
The issue of trust was raised by Sven Gentner, Head of Asset Management, DG FISMA, European Commission (EC).
“Everyone is in favour of green, but huge sums of money are involved… So it is very important to set up a framework to [maintain trust].
“You need to make it verifiable so that there is trust in the market. If you want to raise these huge volumes cannot have a sense that you are not really sure what you are investing in.”
The UN wants firms to make forward-looking disclosures about material climate change risks as part of mainstream and standard business practice. That should include explaining how investments are aligned with climate change goals and what impact those investments have.
Which ESG data is useful?
Jarek Olszowka is Head of Sustainable Finance and Member of EMEA Debt Syndicate at Nomura International.
Referring to ESG, he said, “A decade ago there was not enough data. Now I have thousands of data points I can’t work through, which is not very helpful in terms of making decisions.”
And the volume and velocity of ESG data is only going to become harder to manage – particularly when individuals start to demand that their money is used to promote ESG.
This was illustrated by an example from Gentner who explained how the EC is trying to expand the use of ecolabels – used for goods like washing powder – to financial services.
“It is not straightforward,” he said. “If we make it too strict, it won’t be used. If it is too loose, there will be greenwashing.”
Gentner said fintech can help with transparency and with comparability. He pointed out that the way people make decisions is now very different to ten to 15 years ago – thanks to the wide range of online tools.
“There is very different access to comparability and third-party providers. Fintech will be a very important tool for investors to make decisions.”
The professional investment community also looks set to make more use of fintech. Olszowska said he sees a role for fintech automation in trying to organise and work through the flood of ESG data.
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