Maybe it’s the pandemic, or millennials’ superego manifesting upon the collective consciousness. Maybe it’s the zeitgeist. Whatever the reason, environmental, social and corporate governance (ESG) programs are increasingly finding favor with financial institutions.

That’s especially true now, said Mukund Rao, chief business officer for banking, financial services and insurance for IT services and outsourcing company Mindtree. “I will tell you that if I speak about ESG today … everyone’s interested to hear a little bit more,” Rao told Bank Automation News. Banks want to be seen as “sensitive to these aspects of what’s becoming socially” responsible, he noted.

This interest also applies to FIs hoping to attract talent, Rao added. Millennials are looking at whether companies are socially responsible, whether they are “thinking actively about the environment in the way that they operate across the world,” he noted.

Forward-thinking financial institutions are offering ESG-focused investment products and other “green” services to customers. Technology plays a key role in doing so.

Greening finance

Green Deposit, the first ESG offering from the $184.5 billion Citizens Bank, currently in a pilot phase, allows corporate clients to invest in sectors such as energy efficiency, renewable energy, sustainable food, agriculture, waste management and greenhouse gas reduction. The $2.98 trillion HSBC has a similar offering, and Pat Nuzzo, Citizens’ head of commercial liquidity management, said he expects other banks will soon follow.

On the back end, Citizen’s custom-built product involved a secure, scalable platform on a virtual server that automates daily review of reporting, establishes business rules and runs algorithms for monitoring two portfolios. One portfolio sits on a deposit platform and a second portfolio is on a lending platform, Nuzzo said. Since the two platforms aren’t integrated, Citizens built a scalable platform on virtual server that sits between to automate the daily reviews, watching for moves in the portfolio that require monitoring for transparency reasons.

On the front end, the product uses Tableau and other tools to create the user interface, Nuzzo said.

Citizens engaged Sustainanyltics, a Morning Star company that rates the sustainability of listed companies based on their environmental, social and corporate governance performance. Sustainalytics helped Citizens develop eligibility criteria for what qualifies as ESG along 10 “green” themes and 18 subthemes. Sustainanlytics vets the portfolio to ensure the assets are properly aligned with the eligibility criteria and will provide an annual review going forward to certify the program, Nuzzo said.

Automation platforms

There are automation platforms that financial institutions can use to handle the data to calculate the ESG ratings. Mindtree offers such a solution.

Rao said a lot can go into determining what constitutes social, corporate and environmental responsibility. For instance, Google has a huge campus — what the company does with water, power, energy, and recycling all could be part of the company’s ESG calculation, he said.

“So clearly today for credit ratings, and things like that, you’ve got enough places to go to get that information,” Rao said. “But you don’t have agreed upon ESG rating. There’s nobody tracking ESG controversies right.”

As an example, he pointed to the BP oil spill in May as a controversy that would easily show up and affect BP’s rating, but he said there also could be events that do not show up in the typical financial events tracked by analysts.

Traditionally, research teams had to search through what data they had to try to find relevant information. This is where technology can automate. Artificial intelligence (AI) and machine learning (ML) can parse data from a wider variety of sources, such as shareholder meetings, exchange filings, or corporate social responsibility (CSR) reports available online.

“There’s a huge ability of technology to pass through quickly, efficiently, at low cost; you’re not having to hire an army just focused on passing through information that’s getting generated on a daily basis,” Rao said. “So, I think that is significant application of technology. “

Since such unstructured data can be large, it must be stored in a data mart on a cloud, Rao said. “It then gives you the ability to quickly spin up compute capability to parse through and analyze the data, so you could assess the data, you could run certain algorithms to get insight, and you could generate reports, then that becomes useful,” he added.

“You’re able to go through a lot of data, which is both structured and unstructured, at high speed, with relatively low cost, and you can turn on and off that compute capability that’s on the clock.”

ESG platforms use proprietary methodologies

In general, data is collected by ESG platform providers in one of two ways, Gartner noted in its April “Market Guide for Corporate ESG Ratings and Research.” Either the data is scanned from publicly available corporate annual sustainability reports using web-scraping tools and natural language processing or the firm sends a detailed survey or questionnaire to the companies to self-report appropriate data.

“These surveys are typically extensive, and companies report only on the metrics they actively track,” Gartner stated. “Virtually all vendors use a team of analysts to validate the data scoring is done with a proprietary methodology.”

Read more: Deutsche Bank’s ESG probe triggers review at asset managers

The data is then scored using the company’s own proprietary methodology, Gartner added.

Rao’s Mindtree helps investment firms build ESG solutions and also offers a platform that it has put together with partners.

“We have stitched together from the larger ecosystem, an offering for those who may need a bit of a jumpstart around this,” Rao said. Alternatively, the company engages with companies that want to custom-build an AI-based solution for reporting ESG.

Gartner maintains a list of ESG solution providers, the largest of which are:

• RepRisk with 165,000+ companies covered
• Sensefolio with 30,000+ companies covered
• Clarity AI with 29,000+ companies covered
• Truvalue Labs with 21,500+ companies covered

Caveat Emptor

But buying an ESG platform, particularly to offer investment vehicles, isn’t simply a plug-and-play move. That’s because these solutions, with their proprietary methodology, can be a bit of a ‘black box’ for financial institutions — and that’s bad for transparency.

Companies that want to start an ESG program need to define their program, the criteria for measurement, the collection of data and the information related to the criteria, advised Attorney Michael Volkov in an April post on the topic. Volkov runs a premier boutique law firm specializing in corporate compliance, internal investigations, and white-collar defense.

“Before selecting an automated platform, it is important to understand the ESG frameworks, the criteria and how to maximize ESG factors, definition, criteria, measurement and reporting,” Volkov wrote.

There is no one regulated standard or framework for determining an ESG rating, explained Everest Group Senior Analyst Kriti Gupta. This is an issue not only for banks building out ESG investment tools, but also for financial institutions that simply want to report back to their shareholders their own ESG rating.

“What we currently have are broad guidelines and these guidelines twofold,” Gupta told BAN. “One is how the data is collected and how an ESG rating is assigned … second is reporting, in terms of how banks and financial services enterprises actually reported back to their shareholders. How green are they?”

While that currently means banks have their choice of rating systems, it’s also a situation that’s unlikely to last, said Gupta.

“When it comes to sustainability, currently, we don’t see a state regulation or taxonomy in place. There are some voluntary regulations, but if we see at a global level, we don’t have a taxonomy which all the [banking, financial services and insurance] firms can follow,” Gupta said. “Our understanding is that, in a couple of years, these voluntary regulations will definitely become compulsory.”

To offset the problem, Gartner recommended that CFOs consider using more than one vendor to “develop a more comprehensive and diverse market view” and prioritize vendors that most effectively serve investors, as opposed to regulators.

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