How Automated ESG Scoring Will Help Banks and Businesses Navigate Impending Regulations

9 May 2022

On 21 December 2015, the United Nations announced the Paris Agreement, outlining the stark warning that ‘to stay below 1.5 °C of global warming, emissions need to be cut by roughly 50% by 2030’. The UN followed this announcement by publishing 17 Sustainable Development Goals (SDGs), giving clear, global ambitions to policymakers, regulators, banks, businesses and investors to emphasise the symbiosis between the planet, economic activity and economic development.

Following these initiatives, regulators in the EU introduced the Sustainable Finance Disclosure Regulation (SFDR), the EU Taxonomy Regulations and the imminent Supply Chain Act. These regulations demonstrate a revolutionary change in the way exporters operate and how banks and investors view the risks associated with their clients and their activity.

By 2023 there will be mandatory requirements for banks and businesses to report on both the “Environmental” and “Social” aspects of business activity. These requirements, paired with the emphasis on global trade “Governance” following the Russia-Ukraine conflict, show the ever-increasing importance in carefully managing all Environmental, Social & Governance (ESG) related business activities.

In the same way Anti-Money Laundering (AML) and Know Your Client (KYC) regulations have reshaped compliance processes, ESG reporting requirements will have a massive impact on all banks and businesses’ procurement, business development, and recruitment processes.

The key to ensuring a smooth transition for all parties across global industries is to build non-disruptive and objective solutions that banks and businesses can embed in existing international systems. Developing such a solution will help the industry avoid the nightmare of greenwashing, a considerable risk of self-regulation, and rate businesses in a non-biased manner based purely on business activity.

An industry working group including banks, insurers and professional bodies are currently piloting such a tool in partnership with Coriolis Technologies, described as a “for the industry by the industry” ESG monitoring and passporting instrument for global trade flows. The solution aims to enable financiers to track and prove compliance with sustainability standards in line with the UN’s SDGs, directly correlating with the importance of the Paris Agreement.

The tool ultimately creates an ESG score for goods trade, giving both components and finished products throughout supply chains an automatic, independently derived score that third parties can verify externally.

Kris Makuch, Chief Digital Officer at Coriolis Technologies, said:
“Our ESG scoring tool provides automated regulatory reporting against the EU taxonomy regulations and the UN Sustainable Development Goals. The pilot’s objectives are to test the functionality and integration of the product into working scenarios with partners. From this, we aim to capture further opportunities to add greater country, supply chain, and company level granularity to provide a comprehensive and standardised automated score for banks and businesses across the world.”

There are currently no standards that allow financial institutions to properly assess the entirety of the sustainability performance of all business activity, leaving the industry open to accusations of greenwashing.

Johanna Wissing, head of ESG at ITFA, said:
“Whilst ESG standards – that is, what we are measuring – abound, there are very few tools to allow us to measure how those standards are being satisfied accurately and objectively. The technology proposed by Coriolis Technologies is the best opportunity the market has seen so far to overcome this critical challenge to ESG investment and avoid greenwashing. It has the potential to ensure that the efforts and funds of banks and other responsible participants are properly directed and make the biggest contribution to achieving the important objectives that underlie these standards.”

The system uses Coriolis Technologies’ proprietary data analysis tool for global trade: MultiLateral. This tool connects billions of trade data points, offering unparalleled insight into the complex web of geopolitical risks, macroeconomic trends, and international trade conditions, which interweave to form the complex world of today’s global trading landscape. Using this system as the foundation for ESG scoring creates a unique tool that uses real-world open-source data to build an accurate picture of the ESG landscape.

For such a system to be interoperable and relevant to all industry parties, developing it using a future-proof and flexible framework is crucial. The ESG Scoring system is built not only to evaluate data based on the current EU Regulations and SDGs, but will integrate all relevant future ESG benchmarks and regulations as well.

The ESG scoring tool could not arrive at a more appropriate time. Since the UN announced the Paris Agreement in 2015, analysts and commentators have discussed the many implications of the underlying aims across global industries. During COP26 at the end of 2021, there was an urgency to maintain momentum as the 2030 deadline looms closer. Time is running short for a solution, and automated ESG scoring technology offers a valuable mechanism for the industry to move forward with an intuitive system that works to help banks and businesses avoid penalties from regulators and manage reputation honestly and objectively.

Ultimately, we know why we must measure ESG, and the UN has given us the guides to follow. It’s now time to start measuring, scoring and tracking. Change starts now.