From RegTech to SustainTech: The crucial role of technology in helping financial institutions build digital trust and meet ESG expectations
Technology plays a crucial role in helping financial institutions build digital trust and meet Environmental, Social, Governance (ESG) expectations when ESG is gaining momentum and digitalization becoming mainstream. FinTech firms both complement and disrupt the incumbent financial services providers. At the Knowledge Transfer Forum, held by the Faculty of Business of The Hong Kong Polytechnic University on 24 June 2021, Mr Lapman Lee, Professor of Practice in FinTech in the School of Accounting and Finance at PolyU, elaborated on how technologies, such as Artificial Intelligence, Blockchain, Data Analytics, and the Internet of Things (IoT), can be leveraged to meet ESG expectations from regulators and other societal stakeholders. These technologies have been widely used by financial institutions to meet the ever-increasing regulatory reporting requirements, as part of RegTech.
Lee pointed out that financial institutions need to take action now as regulators in Hong Kong mandated (through the Green and Sustainable Finance Cross-Agency Steering Group) climate-related disclosures by banks, insurers and asset managers by 2025 as one of the five near-term actions that align with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations. The four pillars of TCFD are governance, strategy, risk management, and metrics and targets.
The key challenge of building a Hong Kong financial ecosystem to support a greener and more sustainable future is about data, with the five key ESG data challenges1 being 1) lack of standardization and comparability, 2) data availability, 3) reliability of third parties, 4) forward vs backward looking perspectives, and 5) accessibility and interpretability.
Lee introduced his SustainTech Framework to show how technologies can help 1) capture environmental ESG data in a dynamic fashion through drones, IoT, and satellites, and disseminate the ESG data through data tokens; 2) convert and enrich the ESG data into standardized metrics and reports using AI and data analytics; 3) create digitized investment products using algorithms, blockchain and cryptography to reduce the cost of certification and monitoring to allow smaller projects to be funded and drive a broader investor base. Lastly, 4) cultivate and promote investment behaviours and decisions in line with a consumer’s ESG values through transparency of one’s environmental footprint combining data from banks and external partners shared through open APIs, with social media playing a role in comparing behaviour with peers and sharing best practices.
Needless to say, technologies in isolation cannot resolve the data challenges. Technology capabilities need to be combined with other capability building initiatives, such as skills development, talent development, and education (people), standards and taxonomy setting (process), as part of ESG people, process, and technology capability building, according to Lee.
Lee highlighted that Hong Kong’s role as an international financial centre will be further strengthened when it takes a leadership role combining its capabilities in financial services, FinTech, and innovation. He also discussed the city’s role as a risk management centre supporting a greener and more sustainable future.
The Steering Group’s strategic plan focuses on a few areas: strengthening climate-related financial risk management; promoting the flow of climate-related information at all levels to facilitate risk management, capital allocation, and investor protection; enhancing capacity building for the financial services industry and raising public awareness; encouraging innovation and exploring initiatives to facilitate capital flows towards green and sustainable causes; capitalizing on Mainland opportunities to develop Hong Kong into a green finance centre in the Guandong-Hong Kong-Macao Greater Bay Area; and strengthening regional and international collaboration.
1 Source: ASIFMA "Data challenges and opportunities for ESG and Sustainable Finance in Asia Pacific"