Where might the EU’s decision to label gas and nuclear green leave financial institutions?
This week the EU parliament announced that it has backed EU rules to label investments in gas and nuclear power plants as ‘climate friendly’. The vote will become law unless a majority of the block’s member states object it, an unlikely event according to Reuters.
This news is the latest in a trend were fossil fuels look to be back in fashion amongst investors. The stock markets have seen share prices for oil and gas providers surge recently as the war in Ukraine squeezed out Russian gas supplies, causing a sharp climb in demand. A global energy crisis exasperated by a cost-of-living crisis has caused many ESG advocates to reconsider their principles. Energy security and poverty reduction is suddenly being prioritised over going green, and rightly so, human welfare is at the very core of what ESG aims to achieve.
Moral money
The crisis in Ukraine has thrown the whole concept of what passes the ‘E’, ‘S’ and ‘G’ risk threshold up in the air. Russian companies might have been welcomed by ESG investors for using green energy but are now blacklisted for ethical purposes. Tesla, once commended for its high ESG credentials now scores so badly that the S&P 500 have removed Tesla from its ESG list. The explanation for the removal as explained by a spokesperson for the index, was down to a “lack of a low-carbon strategy” and “codes of business conduct,” along with racism and poor working conditions reported at Tesla’s factory in Fremont, California. Musk has famously criticized the move, which caused its shared price to drop by 6% and labels ESG as a “scam”.
Despite this, the march of ESG regulations continues and reporting is now a mandatory regulatory requirement in Europe, with Asia and the US hot on its heels. Financial institutions will just be getting to grips with the rules and data challenge when geopolitical events like the war in Ukraine throw a spanner in the works and policies change overnight. Compliance departments are starting to realise if they don’t leverage technology to operationalize ESG frameworks and automate processes, they will always be catching up and remain vulnerable to risk.
If the EU’s new rules transpose into law, financial institutions will need to re-assess and apply new risk ratings to their client book and their entire supply chains. This will require robust internal processes and integrations with ESG screening and data providers to access the most current data points for disclosures. An automated system such as this that is embedded into existing client lifecycle management frameworks and leverages financial crime data for know your customer (KYC) compliance, will provide organisational agility and the ability to rapidly respond to changing regulatory requirements. People can focus on serving clients and driving value in investments instead of trying to decipher vast volumes of policy literature, operationalize changes and then manually remediate client books for ESG.
Go digital or go home
Evolving regulation is nothing new and according to research by Fenergo, 68% of C-suite executives at global corporate and investment banks cited complying with the rising number of regulatory requirements and improving data capture and management as top business concerns. With the onset of ESG and rules regarding entity classifications changing already, financial institutions ill prepared to act fast will be on the backfoot.
As Marinus Oosterbeek, venture capitalist at ABN AMRO Ventures said on a recent webinar hosted by Fenergo, “The main opportunity with ESG is to transform the [traditional] compliance tick box exercise into sustainable and viable business opportunities. Banks should leverage technology and teams that are fully focused and dedicated to building the best scalable product in the market to help financial institutions fulfil this mission.”
To watch a recording of our webinar entitled, Operationalising ESG – Transforming a Regulatory Obligation into a Market Opportunity, click here.