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



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.



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.



Augmented automated underwriting and the evolution of the life insurance market



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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How unlocking the potential of tokenised markets can help banks keep pace with the digital economy




Giulia Secco is the Strategic Partnership & Ecosystem Manager at Fnality International.


In the aftermath of the 2008 financial crisis, a person or group of people operating under the pseudonym Satoshi Nakamoto created the first cryptocurrency, Bitcoin. Unlike government-issued currencies, the creators wanted Bitcoin to be operated peer-to-peer by its users in a decentralised fashion, meaning that no central authority, middleman or group would be needed to authenticate and validate the transactions.

To make this possible, Satoshi Nakamoto created a digital ledger which could distribute the currency: the so-called blockchain, which enabled the creation of an immutable recording of ‘blocks’ of transactions, validated in a distributed way by its own network participants (nodes). In the years since, many believe that this it is this technology that could truly revolutionise the financial sector.

Crypto enthusiasts believe that the decentralised blockchain architecture will help to address many current financial inefficiencies, for example by eliminating intermediaries (i.e., banks, custodians, clearinghouses, etc) which play an essential third-party guarantor role in the current centralised system, where ledgers of records are maintained by a central authority that validates transactions. By removing intermediaries, and so, single points of failure, the system gains in resiliency, whilst associated costs can be massively reduced.

Blockchain, also known as Digital Ledger Technology (DLT) – even if the 2 terms do not mean perfectly the same thing – can indeed revolutionise the way different economic agents cooperate enabling a faster, cheaper, reliable, and more transparent capital market infrastructure, which facilitates the building of a secure and reliable P2P global financial market. This can be achieved essentially thanks to the peer-to-peer nature of DLTs, by moving from the current status where settlements require several days to complete (T+), and where one party of the trade is highly exposed to the risk of the other party not fulfilling its liability, to the near-immediate final settlement of financial transactions (T0).

Today Bitcoin is no longer the only cryptocurrency in circulation. Aside from Ethereum, which is the second-largest cryptocurrency in terms of market capitalisation, there is a specific category known as “stablecoins”. As suggested by the name itself, stablecoins have been created with the intent to mitigate the typical volatility of cryptocurrencies, by linking their value to real assets or fiat currencies. The largest stablecoins’ price is usually designed to be pegged as closely as possible to 1-to-1 to the US dollar.

The speed of market acceptance of stablecoins has been remarkably quick, not only for the promise to reduce volatility and offer a more reliable cash-asset but also for providing a quick, cheap, and programmable payment leg able to support the trade of “tokens”, digital representation of values, good and services, based on blockchain.

Differently from what crypto enthusiasts believe, in our view, the future of Finance will not witness complete disintermediation in accessing capital markets and so, certain intermediaries, such as banks and custodians, won’t be disappearing altogether, but rather their role has to change considerably (if they don’t want to perish or even worst, be replaced by innovators).

Why is this? Why can the finance system not just adopt a stablecoin to pay and transfer money globally and instantly?It is because of customer protection. Many regulators and central banks around the globe have developed a deep understanding of this new technology and the growing demand for tokenised cash and assets, and they now recognise the benefits brought about by innovative technology adoption.

Just as an example, the Bank of England announced in April 2021 the introduction of a new omnibus account model that created an opportunity for innovative financial market infrastructures to access the Bank’s RTGS system in a new way. But they are also concerned about potential threats. The main one is around financial stability: if a very large stablecoin suffers from a loss of confidence leading to a stablecoin run that can have knock-on effects on the entire financial and economic system. Another major concern comes from the anonymity that stablecoins can guarantee, making them the ideal medium to facilitate illicit and criminal activities against anti-money laundering, tax compliance, and sanctions.

While stablecoin arrangements are under regulatory scrutiny and in order to be able to bring new payment solutions at scale they will need to be regulated, their role is now also better defined: based on the latest USA President’s Working Group on Financial Markets’ report, stablecoin issuers will need to be treated as depository institutions (aka, banks).

Most payments in the wholesale financial market between banks and other larger institutions are today conducted via central banks’ RTGS systems (real-time gross settlement) due to their zero-credit risk characteristic. Stablecoins however bear credit risk as funds/assets are usually held by commercial banks or other non-central bank entities. In order to replicate such a zero-credit risk payment facility on DLT, the idea of CBDC (Central Bank Digital Currency) has been brought up where central banks themselves issue tokens backed by central bank money.

Despite several POCs, and unlike in the retail space, no wholesale CBDC has yet gone live. We expect that some CBDCs – which are essentially a digital form of a country’s fiat currency, issued and regulated by the national central bank – will serve the retail domestic financial market bringing all the benefits that we have previously discussed (efficiency, resiliency, auditability, transparency). The reason for narrowing CBDCs to domestic markets only, in our view, is due to the significant collaboration required between jurisdictions for cross-border payments, from a technical, legal, and risk perspective.

We believe that the absence of any wholesale CBDC solution yet live indicates that public sector institutions will take advantage of private-sector innovations, like the ones that Fnality Global Payments aim to offer.

We believe that the current traditional financial system could be significantly improved through the introduction of a regulated distributed financial market infrastructure (dFMI), and the introduction of a cash-on-ledger solution with the credit risk characteristics of central bank money (in each national Fnality payment system funds are “backed” 1 – 1 with real fiat currency, kept in a bankruptcy-remote central bank account).

Fnality Global Payments will offer that harmonisation between jurisdictions needed to unlock the potential of tokenised financial markets: through the introduction of such a network of interoperable payments systems, a broad range of applications and platforms will be allowed to use balances held on each system, introducing near-instant settlements, effective intraday liquidity management, and a reduction of costly and inefficient intermediaries.

In association with technology analytics company FNA, we have estimated that for banks, this approach has the potential to reduce their intraday liquidity requirements by up to 70% (a recent Oliver Wyman report has suggested a potential annual saving of up to $75m per bank with an intraday liquidity reduction of just 25%. If the top 105 Tier 1 banks reduced their intraday liquidity requirements by this 25%, they could realise potential industry savings of $8 billion).

Such an approach will empower financial market participants to manage the entirety of their cash and collateral portfolio from a “single pool of liquidity”, solving today’s problems around the fragmentation of liquidity.

With tokenised assets and new exchanges being introduced at an increasing rate, the safe, effective, and regulated cash-on-ledger solution represents the third essential ingredient for this infrastructure. It cannot succeed without it.

The introduction of this on-chain payments leg will mean the full benefits of a tokenised marketplace can be realised. Without it, the cost of dealing with an inefficient legacy payment infrastructure simply doesn’t outweigh the benefits of a new approach.

But with it, traditional finance actors and the broader global economy can truly unlock the full potential of tokenised markets.

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