FinTech Magazine speaks to Dr Dan Philps, Head of Rothko Investment Strategies and Honorary Research Fellow at the University of Warwick’s Gillmore Centre, about the validity of post-pandemic ESG strategies.
We ask Philpps about the legitimacy of ESG today; is there really a green post-pandemic recovery, or are organisations simply greenwashing?
Is it really a green post-pandemic recovery?
The post-pandemic recovery is a mixed picture. While there are positive steps, the trajectory of greenhouse gas (GHG) emissions, as one benchmark, remains concerning, suggesting we're not on track to avoid the risks of dangerous climate change.
Notable efforts include the EU Green Deal, China's 2060 carbon neutrality pledge, India's renewable energy targets, and the US rejoining the Paris Agreement.
However, the effectiveness of these policies in actual implementation is crucial. Technology will play a major role in monitoring compliance with these commitments and allowing governments to be held to account.
What climate change policies can central banks adopt to contribute to a sustainable future, and how do these policies address the intersection of finance and environmental concerns?
Central banks, like the Bank of England, will increasingly integrate climate risk into their financial stability monitoring.
The UK and the EU are leading the way in promoting green bonds, introducing regulations for financial institutions to disclose climate-related risks, and incentivising sustainable finance. Adopting digital currencies can also potentially reduce the carbon footprint of the financial sector.
Central banks thus must remain focused on globally coordinated efforts with regulators, standards bodies, and governments to avoid unintended consequences and to ultimately penalise unsustainable practices and incentivise sustainable ones.
With COP28 approaching, what specific actions and commitments should global business leaders take to effectively respond to the climate crisis, and how can we ensure that these commitments are not merely symbolic / examples of ESG Greenwashing?
Companies are profit-maximising entities operating within constraints set by customers, capital providers, and governments. The heavy lifting of setting us on a sustainable path, at least initially, must be done by governments, regulators, standards boards, central banks, and other major institutions. Investors and customers must also continue exerting the right pressures to enlist corporations fully.
This is not to downplay the importance of corporations, which are central to achieving Sustainable Development Goals (SDGs). Still, business leaders should expect scepticism and set clear, verifiable targets for, for example, emissions reduction.
There should be independent auditing and verification to ensure alignment with regulatory standards. Companies should also disclose environmental impacts transparently, and establish whistleblower protections.
In short, let us judge companies on their verified actions, not their social media posts.
How can fintechs ensure that their ESG monitoring and reporting tools keep pace with evolving ESG standards and regulations?
Because ESG is a regulation super-heavy area, the growing role and power of fintechs developing and using regtech for automating compliance represent a growth engine for the sector and a potential competitive advantage over traditional finance.
Feeding directly into this theme is that technology groups can now couple vast and disparate data resources with artificial intelligence (AI).
This is the key to future state-of-the-art ESG monitoring, verification and reporting (beyond the simpler systematic approaches currently in use) and represents another area where correctly harnessed tech will outperform traditional approaches.
What strategies do you recommend for investors and financial institutions to mitigate the risks associated with ESG greenwashing in their portfolios?
Investors and financial institutions should adopt a multi-pronged approach to mitigate disinformation risks, such as green-washing. This starts with rigorous due diligence on investments, systematic monitoring and regular verification.
While rating agencies currently dominate ESG risk management processes, traditional ratings are regularly biased by inconsistencies, underlying data issues, and opacity, while generally providing a one-size-fits-all approach that is not appropriate for many needs.
The alternative is for technology-capable groups to leverage the vast data resource now available with the latest AI, such as LLMs, to form targeted ESG risk assessments.
How can firms incorporate the UN's SDGs into their strategy and help save the planet from catastrophic climate change?
By first understanding the relevance of each goal to their operations, companies can incorporate the UN’s SDGs into a comprehensive plan that is consistent with the needs of all of their key stakeholders. A plan should set out clear, measurable targets and transparently link these back to auditable goals.
To boil such a plan down into a mindset, as Sir David Attenborough put it, “just don't waste”.
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