How advanced analytics can help monitor and manage ESG risks

The rise in importance of climate change on the business agenda has been impossible to miss. With this rise, the need for financial organisations to address ESG matters is reaching a boiling point.

A recent post by Quantexa examined how recent events have reinforced the urgency of addressing ESG risks and how advanced analytics can help in that fight.

The need to bring more clarity to the ESG process has been reinforced by recent events. Recently, the European Central Bank released its first ever, large-scale assessment into how well-prepared EuroZone banks are to managing climate and environmental risks. This assessment found that no supervised bank was close to meeting all ECB expectations on climate and environmental risks.

Meanwhile, in November 2021 a new global organisation – the International Sustainability Standards Board – was announced with the mission of defining standards for how firms should disclose their risks, plans and progress on sustainability issues with a global baseline.

Quantexa highlighted that one of the biggest challenges has been how to measure, monitor and mitigate ESG risks – and the lanch of the ISSB is designed to help address that. The firm said, “ESG risks are not only a function of a company’s own physical assets, location, and industry sector, but also the risks that affect each individual company’s supply chains (Do they meet the ESG Risk score?, do they have a sustainability score?), customer base (what industries are they in?, who are the directors within the company?, is their governance structure transparent?), partners and strategic allies, government policies and other factors.”

Quantexa added that many banks and insurance firms need to embed the above ESG valuation into their lending and underwriting policies and they will have to dig deeper than just relying on the words and public statements of their customers and potential customers regarding ESG criteria being met. Firms will have to be able to understand their customers’ progress and performance in meeting ESG goals and conduct dynamic behavioural analytics and scenario analysis, as this will impact the banks’ own ability to achieve their ESG goals.

Many financial institutions are creating strategies and goals to hit a minimum of 50% of new green lending by the end of the decade. Such targets need infrastructure, automation and connectivity to achieve success.

According to Quantexa, a strategic approach will require risk governance functions to model and evaluate a wide range of ‘what if’ scenarios regarding ESG risks. For example, conducting the climate change stress tests in the longer term should relate to banks’ existing risk and lending data/models, linking the limits, risk appetite and concentrations to assess capital and ESG strategy impact.

The InsurTech firm remarked, “Monitoring, reporting and delivering on ESG KPIs takes quality (and volume) data and insight. The critical challenge is not so much about what or how much to report on, but rather to ensure the accuracy of what is reported. With investors and customers demanding more transparency around ESG, it is best to gather insights from a range of initiatives and use it to improve data quality, accessibility and traceability.”

In order to do this, companies must move away from spreadsheets to automate data collection by leveraging advanced technologies, establish a data platform together and analyse ESG data from operations as the value chain and leverage ESG ratings and research data to learn what investors know and improve ESG scores and benchmark against peers.

Quantexa stressed that advanced analytics tools – designed with such challenges in mind – provide financial services the ability to simplify the complexity that comes with analysing and connecting unstructured and large volumes of ESG data points as well as conduct a search of unstructured data automatically and within markets.

By improving scores with ESG data, companies will be able to deliver analytical, reporting and business application tools that can provide the needed hindsight, insight and foresight as well as empowering business units to measure carbon footprint, supply chain optimisation and green revenue in real time.

Quantexa concluded, “We can expect significantly more time and effort to be devoted to this issue in C-suites and board meetings around the world than ever before. Many companies will see ESG risk disclosures and climate risk stress testing as a strategic opportunity which can use to excel, while others will address the issues reluctantly, motivated by concerns about falling behind peers or being called out by regulators or investor groups.”

Read the full post here.

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