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Tips to Overcome ESG Data Selection Challenges

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Gediminas Rickevičius, VP of Global Partnerships at Oxylabs

 

Environmental, Social, and Governance (ESG) guidelines promise better investment outcomes with multiple benefits to citizens, the environment, and the economy. Despite the perceived benefits, challenges continue to emerge with establishing ESG ratings and data collection.

Developing industry-wide standards are part of the solution, however firms can also take measures to establish a framework when analyzing data sets and company rankings. Web scraping is an additional solution that empowers firms with actionable data when checking ESG scores.

What is ESG Criteria?

ESG guidelines attempt to assess investment outcomes with a focus on environmental, social, and corporate governance goals. Environmental criteria are primarily concerned with reductions in waste and greenhouse gas emissions, and management of water supplies. Social guidelines assess businesses on their activities concerned with consumer protection, employee welfare and wellbeing, financial activities (such as lending), human rights, and community impact.

The third component of ESG guidelines includes the promotion of Diversity, Equity, and Inclusion (DEI). These programs and policies aim to promote equal participation of individuals based on group identity factors that include gender, skin tone, culture, age, sexual preference, and religion.

Gediminas Rickevičius

ESG Investing is Growing

According to Bloomberg, ESG investing will reach $53 trillion by 2025. Individual shareholders are also voicing support for social and environmental proposals, with an increase from 21% to 32% between 2017 and 2021.

Currently, global assets under ESG management amount to $35.3 trillion in the United States, Canada, Japan, and Australasia. European firms lead the way with over 50% of investment assets under management following the EU’s 2016 ESG global mandate.

How ESG Ratings are Calculated

ESG scores or ratings are based upon a company’s success in addressing its environmental, social, and governance responsibilities. While some of these responsibilities have material consequences, most are important to stakeholders for non-financial reasons.

ESG ratings are not established by a standard system. Instead, there are several ESG rating agencies that provide investment assessments based on a business’s ESG performance. Most of these agencies have varying methodologies when assigning ESG scores, making it challenging for investors to understand a company’s performance in real terms. In addition, these calculations are typically based on a company’s “perceived” activities, and may not account for all positive practices put into place.

ESG Scoring Factors

ESG scoring factors vary significantly from one agency to another. Factors that contribute to the overall rating typically include:

Environmental Scoring Factors

Environmental scoring factors can include commitments to renewable energy, climate change, water pollution, soil contamination, and waste production.

Social Scoring Factors

Social scoring ratings are primarily based on relationships with employees, shareholders, suppliers, and partners. Factors that determine this rating include employee compensation, workplace safety, health benefits, and workplace conditions of operations located in other parts of the world.

Corporate Governance Scoring Factors

Corporate governance scoring depends onboard activities, regulatory compliance, and legal operations. Factors that influence this rating include compliance with federal, provincial, state, and municipal laws, executive compensation, and if the board of directors comprises individuals from different identity groups.

ESG Data Challenges

The ESG space faces numerous challenges that specifically concern score calculation and regulations. Some of the most frequent criticisms underlying this framework include:

Inconsistent Grading Methodologies and Data Standards

In the absence of a regulatory framework, rating agencies typically use different methodologies, resulting in varying scores for the same company. In addition, there is a challenge in quantifying facts such as biodiversity investment, carbon footprint, and what constitutes a “diverse” management team. Besides the lack of a consistent framework, firms do not use normalized data sets across varying time periods, resulting in inconsistent conclusions about a company’s adherence to ESG standards.

Corporate Greenwashing

Greenwashing is a deceptive marketing practice that attempts to convince investors that an organization is committed to sustainable environmental goals. The overall purpose is to include the company in sustainability indices for inclusion in investment portfolios, and to promote a positive public image.

How to Choose ESG Data

Despite the challenges facing ESG investing, firms can take action to obtain relevant data when assessing sustainable investments. Some tips when formulating a strategy include:

Set firm-specific ESG goals

Ethical investing is more than just a passing trend. Digital innovation enables investors from all demographics to see the effects of corporate activities across the world.

Creating firm-specific ESG goals can be profitable from a retail perspective – particularly with younger “millennial” investors. According to a recent report, millennials drove sustainable investment from $5 billion in 2015 to $51.1 billion in 2020. Investors today are more concerned with the power of their money than ever before – and investment firms are responding by creating funds that align with current global issues.

Evaluate data quality

Firms should vet data for completeness and transparency. Reporting on a limited data set may not provide a complete picture that considers the source and methodology. In addition, some data sets have gaps that make the data inaccurate and unreliable. Choose a provider that continuously tracks indicators to produce timely data that is relevant.

Gather data with ethical web scraping

In the absence of consistent data sets, many investment firms choose to obtain their own data with web scraping – a process that extracts public information from websites.

Web scraping can be used to collect publicly available ESG data from multiple sources, including company websites, online directories, and other sources. Areas of interest to ESG investors can include:

  • Investment in sustainable energy
  • Air quality
  • Health and safety procedures
  • Waste removal
  • Employee compensation and benefits
  • Shareholders’ rights
  • Diversity, equity, and inclusion
  • Board structure and tenure

Businesses opting to gather public data can employ an in-house team or use a web scraping tool customized to extract data from any public source.

Learn more about scraping critical ESG data

Finance firms increasingly use web scraping to extract ESG and alternative data critical to successful investment decisions. Download “Alternative Data Unlocks Key Decisions in the UK & US Finance Industries” – our complimentary white paper that explains:

  • The dominance of alternative data across the global finance industry
  • Regional differences in the UK and US finance sectors
  • Most valuable data extraction methods
  • Data extraction challenges
  • Emerging data collection strategies

ESG investing has grown substantially in recent years and is forecasted to increase. Download our whitepaper to learn about data extraction solutions that drive precision investment strategies and comply with ESG guidelines.

Business

How can businesses boost employee experience for finance professionals?

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By Martin Schirmer, President, Enterprise Service Management, IFS

Over the course of the last year, The Great Resignation has seriously impacted organisations across the globe. Staff are quitting in huge numbers, leaving companies unprepared and struggling to fulfil their workloads. In fact, mass departures are happening at all levels of the labour market, as employees attempt to adapt to the hybrid working model and growing socio-economic uncertainty.

In light of this, optimising the employee experience (EX) to attract and retain talent has become a top priority for employers. Organisations have come to understand the necessity of taking immediate steps to drive employee engagement and reshape workplace culture.

The financial services (FS) industry is no exception to this trend. From increasing employee burnout to growing career dissatisfaction, the pandemic has exacerbated the need for transformation across finance teams. This is exemplified by recent data from Spendesk, which found that approximately 40% of finance professionals are willing to leave their roles or already have concrete plans to do so.

Organisations looking to get ahead of the competition must put in extra efforts to retain their existing workforce. The fact is that employee expectations and requirements have irreversibly changed, with more workforces becoming increasingly distributed. Today’s hyper-connected workforce values flexibility and simplicity, and it is organisations which offer these experiences that will succeed in the long term.

As part of this process, finance companies must look towards the power of technology to create seamless user experiences across devices. From automating workflows to improving overall efficiencies, Enterprise Service Management (ESM) can help organisations to boost user satisfaction and go that extra mile for their employees.

How poor EXs are driving finance teams to quit

With over 40% of employees spending a significant proportion of their time carrying out mundane, manual tasks, it is not surprising that poor EXs are having a detrimental impact on job satisfaction. Finance teams in particular have been slower to digitise core processes, leading to a heavy reliance on manual tasks. This not only increases the amount of time spent on each task, but also impacts the engagement levels of finance professionals who cannot focus on more strategic aspects of their roles.

As a result of the pandemic, flexibility has also moved to the forefront of finance teams’ desires. Given the fast-paced nature of this industry, the conversation surrounding work-life balance has increased rapidly. Failure to offer flexible working policies, coupled with a lack of technology to facilitate this flexibility, has led to poor EXs across the board.

Most notably, the overarching move to omnichannel, digital-first approaches has dramatically reset both customer and employee needs. Finance is the third-slowest running corporate function behind legal and IT. Operating in a competitive environment, 73% of finance operations are facing pressures to speed up, improve efficiency, and prioritise automation.

Mitigating the problem using technology

ESM, an offshoot of IT Service management (ITSM), is the cornerstone of smart digital transformation for organisations. It can help finance teams to streamline and automate routine processes, such as monitoring the status of service requests, approving expenses, sending invoices, and tracking payments. In turn, this will free up employees’ time, reducing the burden of manual tasks and enabling them to focus on the more strategic tasks.

Another advantage ESM can offer finance teams is the ability to adapt to each department’s minimum requirements for data privacy. Accounting, for example, needs additional layers of compliance built into the system.

ESM can also facilitate cross-departmental collaboration, helping finance professionals to communicate with the wider business and perform tasks more effectively.  Organisations can use ESM to incorporate all internal services into a single platform, offering employees a well-rounded view of the business and promoting a sense of community across all levels of an organisation. This will boost productivity, whilst enhancing visibility and control.

Ultimately, the current job landscape has brought with it a new set of challenges. Organisations in the FS industry looking to navigate the storm and retain top talent must refocus their efforts on bolstering the EX. Embracing a new era of technological innovation that empowers employees and boosts engagement is a critical step in this process.

 

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Business

CBDCs: the key to transform cross-border payments

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Dr. Ruth Wandhöfer, Board Director at RTGS.global

 

If you work in finance, you’ll have been hearing a lot about central bank digital currencies (CBDCs) and the moves different markets are making towards using, regulating and evaluating the viability of moving to an economy based on digital currency.

We are already seeing progress in the research, piloting and introduction of CBDCs into the financial system. The Banque de France for example, recently launched its second phase of CBDC experiments in line with the “triple digital revolution” unfolding in the financial sector. The infrastructures of financial markets and fintechs, however, are not prepared to accommodate their security, stability, and viability.

This could be an issue in the not too distant future. Each year, global corporates move nearly $23.5 trillion between countries, equivalent to about 25% of global GDP. This requires them to use wholesale cross-border payment processes, which remain suboptimal from a cost, speed, and transparency perspective. In fact, the G20 cross-border payments programme considers improving access to domestic payment systems that settle in central bank money, as one of the key components in facilitating increased speed and reducing the costs of cross-border payments.

The current state of cross-border payments

International transactions based on fiat are currently slow, expensive, and highly risky due to today’s disconnected financial infrastructure, messaging, and liquidity. Wholesale cross-border payment settlement can take 48 hours or longer, which is not practical in today’s digital world. Even if not every market moves to CBDCs, in an increasingly digital era, cross-border settlements between central banks will unavoidably involve dealing with CBDCs. So, not only will we have different currencies, we’ll have different technical forms of currency being exchanged – digital and fiat – as markets adopt CBDCs at different rates, adding another layer of complexity to cross-border settlements.

While there is much anticipation about the opportunities CBDCs can bring, the adoption of this technology will only be widespread if payment and settlement capabilities are overhauled to allow for new innovations in currencies.  This need for transformation represents an opportunity to redesign existing infrastructure to support cross-border CBDC transactions.

The current cross-border payments system involves correspondent banks in different jurisdictions using commercial bank money. Uncommitted credit lines used in cross-border transactions are a potential risk for any bank that relies on credit provided by a foreign correspondent bank. Interestingly, there is no single global payment and settlement system, only a complicated network of interbank relationships operating on mutual trust. While trust has allowed financial systems to function smoothly, when it begins to fail, as it did during the 2008 financial crisis, the result can be catastrophic.

Following the crisis, the Bank for International Settlements (BIS) implemented the Basel III agreement, which required banks to maintain additional capital against correspondent banking account exposures. These risk-weighted assets impose a costly capital charge on positions held by banks at other banks under correspondent arrangements. While this framework helps combat risk, it neglects to address the inherent problems in traditional correspondent banking that contribute to these risks.

Making the case for CBDCs

CBDCs can offer an improvement in settlement risks and are certainly thought to have potential benefits by the BIS. If implemented correctly, wholesale CBDCs can indeed accelerate interbank transactions while eliminating settlement risk. They can also encourage a more efficient and straightforward method of executing cross-border payments by reducing the number of intermediaries.

It is likely the evolution towards CBDCs will initially see the financial market supplement rather than replace existing payment instruments with new types of digital currency. CBDCs will coexist with current forms of money in a wholesale context, and their payment rails will also work alongside the existing payment systems. In simple terms, CBDCs will need to be linked to the broader capital markets ecosystem and applications such as securities settlement, funding, and liquidity.

If built with an innovation-first mindset, the future of banking infrastructure should provide full interoperability and convertibility between fiat, CBDCs, and any other type of digital money used in wholesale payments.

The future of CBDCs

To unlock the full potential of CBDCs, a ‘corridor network’ will need to be formed. This involves combining multiple wholesale CDBCs into a single, interoperable network under common governance agreed upon by all central banks involved. The legal framework of this platform would then allow for payment versus payment (PvP) or, where applicable, delivery versus payment settlement.

Practical wholesale CBDCs appear to be on the horizon, either as a supplement to existing financial systems or as part of a transition to a digital, cashless world. Looking ahead, central banks would benefit from collaborating with fintechs that provide innovative cloud native technology to enable seamless wholesale cross-border payments without interfering with the flow of funds. If wholesale CBDCs are to become a reality, fintechs must be prepared to accommodate them.

 

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