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Banks have to hot-house green trade finance with the best tools available

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By Simon Ring, Global Head of Maritime Trade Technologies & ESG, Pole Star

While the heat is on marine transport industries to reduce the greenhouse gas emissions from shipping, the trade finance sector knows it cannot escape responsibility. No bank wants to be exposed as the enthusiastic funder of carbon-emitting vessels running on dirty fuel.

Whether trade finance organisations welcome it or not, global banking is increasingly part of the battle against climate change. At the end of last year, for example, the UN-led Net-Zero Banking Alliance unveiled itself, representing 40 per cent of global banking assets. It is committed to the adoption of lending and investment “aligned” with net-zero emissions by 2050, with “intermediary targets” set every five years from 2030.

As more initiatives emerge, banks and institutions financing trade transactions will be expected to incentivise the maritime industry to cut its almost three per cent annual contribution to global carbon emissions. Targets imposed by the International Maritime Organisation and the 2021 COP26 climate change conference last October pumped up the pressure for trade finance banks to offer preferential terms to transactions using greener carriers. Regulation is looming and EU banks, for example, are to undergo climate stress tests this year, meaning they must show they are reducing their overall carbon risk.

Simon Ring

Assessing each trade transaction for its greenhouse emissions may seem straightforward to outsiders, but in reality it is complex, covering vessels, fuels, cargoes, routes and operational practices. Banks’ compliance departments are already tasked with anti-money laundering and sanctions requirements. By adding another layer of time-consuming due diligence processes they risk incurring the displeasure of exporters and importers who have access to finance from dozens of banks. It could be difficult to stand out from the competition without risking compliance failures.

Although banks are advancing the green agenda in many new ways, such as sustainability-linked bond transactions and loans, when it comes to trade finance they need to adapt quickly. Failure to act could see them lose out when new regulations come into force as newer, more agile financing platforms adapt more swiftly and to greater effect.

The solution lies in obtaining greater insight into each transaction and the vessel or vessels involved. This is the only way to ensure the banking industry is financing transactions that use compliant vessels and fuels and that all the parties involved are following best practice.

The new reality is that governments and regulators increasingly expect banks and lenders to incorporate ESG (environmental, social, and governance) considerations into their operational and financial decision-making processes. The global drive for increased sustainability increases pressure for banks to offer preferential financing rates for transactions that demonstrate compliance with emissions reductions targets and use the best tools available to be as environmentally-friendly as possible. It means banks need to see what and who is involved in a trade transaction, including charterers and operators.

The pressure on maritime trade to reduce emissions constantly increases. The International Maritime Organization, which is part of the United Nations, is aiming for a 40 per cent reduction by 2030 against a 2008 benchmark, for instance.

The challenge for banks’ and lenders’ risk, compliance, and legal departments is that once a transaction is under consideration they need accurate, real-time information about the compliance and sustainability status of vessels involved and the routes they will follow. It is often even more complicated to quantify the environmental impact of the commodity that a vessel is transporting, but this will also become an important factor.

Benchmarking and automated environmental impact screening

While the emissions targets and regulations often feel like yet another administrative burden, there is no escaping the demands of sustainability. Many vessels are now built to higher standards and banks need to identify those with superior environmental ratings in order to offer preferential financing terms to the charterers and owners.

The Poseidon Principles, launched in June 2019, were an attempt to connect ship financing with environmentally-friendly behaviour and decarbonisation. Applicable to lenders, lessors, and financial guarantors including export credit agencies, they have established a global baseline in relation to climate goals.

These kinds of benchmarks that rely on annual evaluations are fine, but in the era of 24/7 finance and blockchain platforms, the banking industry needs information that is pretty much real-time. It requires detailed data about the current status of a vessel and the proven and monitored ESG credentials of all the main organisations involved in a transaction.

Using manual means to achieve this will never be cost-effective. What has changed is that banks can now use automated solutions that monitor emissions sustainability right along the supply chain.

Automated solutions include the carbon emissions measurements conducted by expert companies using recognised techniques. In practical terms, it enables a compliance department to rate a vessel, its peer group, and its carbon tonne per mile within a matter of seconds, while also producing an essential audit trail. Banks can access and analyse this information on the same set of screens they use to check sanctions and money laundering compliance. Such integration enables them to use the high quality data produced to demonstrate compliance and best practice to governments and regulators.

Comprehensive monitoring and new due diligence practices

The availability of this technology enables banks to screen the environmental impact of each of their commodity transactions, using a range of real-time indicators that includes climate effect, human exploitation, soil erosion, deforestation, and water productivity.

This level of screening, covering vessels, carriers, and charterers for ESG compliance is set to become a standard part of due diligence. As governments and regulators move to reduce emissions from global trade, banks, trade finance platforms and insurers will need more effective technology so they can spur on the growth of green, sustainable trade finance. The only effective way of achieving this without imposing a near-intolerable layer of bureaucracy is through automation and the integration of ESG monitoring into systems and workflows. This is a technology integration that trade banks cannot ignore. They need it so they can demonstrate to the world they are playing a major part in the battle to increase sustainability and reduce climate change.

Banking

Augmented automated underwriting and the evolution of the life insurance market

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By Alby van Wyk, Chief Commercial Officer at Munich Re Automation Solutions

 

It’s almost inevitable. Spend your working life identifying, analysing, quantifying and ascribing monetary value to risk, and you’re likely to have a fairly strong aversion to it. Or more accurately, an aversion to undertaking new endeavours with inadequately understood consequences. The insurance industry is, on any number of levels, the very definition of risk-averse.

And yet, for all the commentary suggesting otherwise, insurance still has an appetite for innovation. If the insurtech sector is any indication, then an interest in and requirement for new solutions is being recognised and slowly addressed.

Declan O’Neill

It may not employ the language of disruption that runs through the wider fintech market, it may be short a few unicorns and unable to boast some of the record-breaking funding rounds, but a quiet tech evolution has been building in insurance nonetheless. Hence the advent of automated underwriting facilitated by more advanced algorithms and data analysis.

Where insurtech does overlap with its more vocal fintech counterparts is in the greater use of artificial intelligence (AI) and machine learning to solve age-old problems around data analysis and interpretation.

It’s about five years or so since AI first became a topic of conversation in insurance. Since then, despite the intensity of the debate, it has often felt like a reality that is always just over the horizon – a destination that kept moving even as more and more efforts were directed towards it.

But recent research suggests that the journeys made so far have not been in vain. We are at a point where embracement of AI is about to step up a gear. The global value of insurance premiums underwritten by AI have reached an estimated $1.3 billion this year, as stated by Juniper Research; but they are expected to top $20 billion in the next five years. As a destination, it is closer and more attainable than ever before.

However, AI is not an island. Its promise of $2.3 billion in global cost savings to be achieved through greater efficiencies and automation of resource-intensive tasks will not be achieved in isolation.

AI remains part of a more complex ecosystem of data gathering and analysis. It can apply new technologies to get the best out of the already established and still-emerging data sources that feature in underwriting offices around the world. It emphatically does not require these existing investments to be ripped out, replaced or downgraded.

It is more helpful therefore to see AI as the differentiating factor in the latest generation of insurance IT: augmented automated underwriting, or AAU for short.

AAU gives underwriters the ability to spot patterns and connections that are, frankly, either invisible to the human eye or which take normal, human-assisted processes unfeasible amounts of time and resource to identify.

Whereas earlier generations of automation were able to pick up the low-hanging fruit of insurance markets – the individuals whose driving history fit into clearly delineated boxes, for example – AAU can take into account all of the rich complexity of the human experience. It can spot the nuances and individualities that populate the life market, for example, and translate those into accurate policies.

That’s good news for both underwriters and their customers. AAU can significantly reduce the need for separate medicals, repeated questions, lengthy decision-making processes, and drastically increase the speed at which a potential insurer can get a quote and cover – while continually improving the way risk is calculated and managed.

It can make sure the decision-making process remains in the hands of underwriters rather than IT departments, enabling them to set and update the rules and parameters as befits their preferred business model. It consequently makes advanced, complex and precise decision-making available to a broader range of underwriting businesses – which is good for those businesses, good for customers and ultimately good for the entire industry.

AAU – augmented automated underwriting – is an example of the realisation of AI’s promise. As such, it’s set to become one of the key talking points and disruptive technologies of the insurance industry. And this time, AAU is both a journey and destination that all progressive insurance organisations need to be considering for their future operations.

 

 

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Banking

ESG in the finance and banking industry – are you ready?

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By Julian Moffett, CTO BFSI, EDB

 

Environmental, Social and Governance (ESG) has soared towards the top of banking, financial services, and insurance (BFSI) and other boardroom interests. Organisations everywhere know they need to take ESG and greenhouse gas emissions (GHGs) seriously not only because it is the right thing to do for the future of the planet or because it can help attract and retain talent, but also, because failing to do so may pose a risk to the economic value of their businesses and encourage probes by governments, watchdogs and non-execs. However, complying with complex reporting and going the extra mile to actually deliver on the goals of the rules is a challenge in many ways, not the least of which is in achieving the required excellence in data management to underpin strong reporting on ESG.

 

What is ESG? 

Julian Moffett

ESG is an umbrella term that covers a broad gamut of activities. Gartner defines ESG as “…a collection of corporate performance evaluation criteria that assess the robustness of a company’s governance mechanisms and its ability to effectively manage its environmental and social impacts.”

The CFA Institute describes the environmental element as focusing on “the conservation of the natural world” and includes measuring “climate change and carbon emissions,” “air and water pollution” and “biodiversity” among many other measures. Social considers “people and relationships” looking at areas including “customer satisfaction,” and “gender and diversity.” Governance covers “standards for running a company” and analyses factors such as “board composition,” “audit committee structure” and “audit committee structure.”

 

Status of the current regulatory environment

There are many bodies proposing rules to formalise ESG monitoring and seeking to ensure corporate compliance. Some example groups, frameworks and bodies:

  • The Task Force on Climate-related Financial Disclosures (TCFD)
  • Streamlined Energy and Carbon Reporting (SECR)
  • The International Regulatory Strategy Group (ISRG)
  • The Sustainability Finance Disclosure Regulation (SFDR)
  • The International Sustainability Standards Board (ISSB)
  • The Sustainability Accounting Standards Board (SASB)
  • Sustainable Development Goals (SDGs), the Global Reporting Initiative (GRI) support efforts such as the US SEC’s Climate and ESG Task Force.

Financial services organisations are very aware that the current regulatory landscape is far from mature (and will continue changing) both in terms of alignment between bodies and also with regard to when the new rules will come into effect. At the of time of writing:

  • The requirement for Scope 2 disclosures (see below for description) for the Sustainable Finance Disclosure Regulation (SFDR) will likely come into effect in 2023
  • A proposed Corporate Sustainability Reporting Directive (CSRD) should be agreed by the European Parliament this year for implementation in 2024 to report on performance in 2023.
  • Meanwhile, the SEC has just released its proposed rules for climate-related disclosures, which,if passed in legislation, may come into effect as early as year end 2022.

 

Reporting Obligations 

Reporting can cover a wide range of areas covering energy consumption, GHG emissions, water consumption and waste management to health and safety, labour rights, diversity and inclusion to ethical conduct, and even areas such as appropriate executive compensation.

While the regulatory reporting obligations are not yet finalised, the expectation is that compliance may prove to be an onerous task. For example, organisations are under pressure to monitor carbon emissions but even so-called Scope 1 emissions (those that come from owned or controlled emissions) can be hard to track. Factor in Scope 2 (indirect emissions such as purchased power) as well as Scope 3 emissions from up and down value chains, and the reporting task at hand is difficult indeed.

To measure, monitor and manage in addition to staying on the right side of rules, organisations need to have excellent data management fundamentals, strong reporting tools and a new class of applications, which also have the agility to adapt to rapidly changing regulatory demands. Data will be used both to support decarbonisation measures but also to identify where there are disclosure gaps. It was telling that when the SEC issued a press release on its Enforcement Task Force, it specifically referred to data:

“The task force will also coordinate the effective use of Division resources, including through the use of sophisticated data analysis to mine and assess information across registrants, to identify potential violations.”

Having reliable data comply with emerging rules isn’t the only essential requirement for organisations. Institutions need such data to understand where they are in their journey to sustainability, so that they can set sensible targets and track progress against them. Organisations will have to cover the data trifecta of availability, management and transparency. Many organisations may be stuck in the early stages of managing ESG, overly relying on manual processes, spreadsheets and email. But their target should be to get to real-time data insights that are easily visualised, understood and shared. As a foundation, BFSIs need to capture, manage and securely share data reflecting consumption and safety to emissions, financials and data from surveys measuring results against ESG targets. Data emanating from ERP and other back-office systems, performance data from third-party associates, media and social network coverage, spatial/geolocation systems and beyond should also be factored in.

 

Actually reducing GHGs

Organisations are using a wide variety of ways to reduce emissions and improve their footprints from using renewable energy sources to making secondary use of energy; for example, in the case of one university, this is done through capturing data centre heat in hydroponics. For IT, making broader use of multitenancy in cloud computing and hosting services is a popular way to reduce emissions. Not only do these large data centres offer an economy of scale, they also tend to be state of the art in their use of renewables and highly efficient hardware and other infrastructure. Gartner, in an article titled The Data Centre Is Almost Dead, says it expects 80 percent of enterprises will close in-house datacenters by 2025. For me, the jury is out on this one but an interesting one to monitor going forward.

 

Conclusion

We are at the start of a very significant inflection point in regulatory and consumer expectations around ESG. BFSIs should be under no illusion that momentum is building rapidly in terms of having to address strict reporting requirements and implement strategies to reduce GHGs.

However, we also see this as a time of positive change. As the leading provider of Postgres, EDB is excited to help organisations further their ESG goals as the journey unfolds. We are closely monitoring the implications of ESG regulations as they will give rise to a new class of applications and drive adoption of green data centres. We see OSS, including Postgres, as playing a key role in this shift as often the movement to private and public cloud helps accelerate application modernisation and enables displacement of outdated incumbent technology (including database) platforms. As the leading provider of Postgres, EDB is excited to help organisations further their ESG goals as the journey unfolds.

 

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