In finance, the sustainability agenda has now been condensed into three letters – ESG – standing for environmental, social and governance factors that can be embedded into business decisions.
But the rising popularity of ESG investments in an unregulated market has also attracted quite a few bad apples, leaving investors overwhelmed with the rising number of options, many of which might not even be as “green” as their label suggests.
There’s an increasing demand for services that help banks and financial institutions discern between all these new labels that have grown in popularity almost overnight. And the supply side is responding – Temenos, one of the biggest banking infrastructure providers in the world, has launched an ESG investing-as-a-service tool for banks.
I’ve invited Temenos’ Chief ESG Officer Kalliopi Chioti to tell us more about their approach.
Kalliopi had some really inspiring perspectives on sustainable finance, and the rising demand of sustainability investment tools as ESG moves into the mainstream. We also talked about the new sectors to watch as finance becomes more environmentally conscious and more digital – as AI and data have their role to play in green finance too.
The following excerpts have been edited for clarity.
Do you think currently banks/fintechs/financial institutions are sustainable organizations? And if you think not, how can they become sustainable organizations?
Kalliopi Chioti: Right now, ESG, or sustainability, has come to the top of many, many companies and banks’ agendas at this point. I’m talking about banks, because these are our clients, and we know them really well. Banks are committing to ESG targets, and they’re setting net zero plans, they need to have ESG considerations within their operation products. So this is a very hot topic, and climate change that we see with the energy issues happening around the globe at this point is currently a major challenge. But it creates both threats and opportunities, and it has a significant impact on the economy in the banking sector.
Some companies and some banks might be ready, but some of them need to do some more in order to become truly sustainable organizations. It’s still evolving, but I believe that banks are in a unique position to influence the transition to a low carbon economy. And they can do that by reducing the impact of their own operations as well as the emissions they finance.
We all understand how this pressure will get pushed down to the suppliers of the banks, and we as a supplier of the banking industry, understand the implications of climate change and have the know-how to help them transition to a low carbon economy. What I would mention is that first, the banks need to measure and reduce the direct impact of their own operations, as they have net zero plans in place.
All these years they have been aiming to digitally transform, mainly driven by financial and compliance pressures, competition and customer demand. But by moving the technology infrastructure to the cloud, this has enabled banks to answer these challenges. But at the same time, cloud is also helping banks address other key challenges like the net zero race. So compared with legacy IT infrastructure, the cloud is a low carbon technology, due to the benefits that it actually offers at the end of the day is optimization of application development and performance, as well as significant efficiency gain from hyper scalar data centers. They estimate that SaaS and cloud can reduce energy and emissions by over 95%, compared to legacy IT infrastructure.
But banks need to measure and reduce their direct and also the indirect impact of their own operations, or the emissions they finance, which is a bit more challenging. So using AI in asset and wealth management as the basis for impact investing allows banks to measure the non-financial impact of their portfolios and choose the options that fit best with our investment strategy and values. So what we see here is that, in order for banks and financial institutions to become truly sustainable organization, they need to embrace cloud and SaaS technology. And at the same time, they need to be able to use the technology and especially AI in order to be able to get into fields like sustainable investing. And this is something that we see through our clients.
Can you tell us a little bit about the AI tools that are currently available for those that are digital to kind of encourage more sustainable options? How can data solve this problem for the financial system?
Kalliopi Chioti: Digital finance is helping a lot in this direction, and banks understand the urgency to act, and they understand that technology is on their side at this point. And this is why we have been integrating ESG into our core strategy and product offering in order to help our clients transform into smart, inclusive and sustainable organizations. We have incorporated ESG into the Temenos’ banking cloud, as I mentioned to you, and we help clients measure, improve and report on their carbon footprint of their operations, as well as the emissions they finance.
We’re looking specifically at the investment perspective, as you mentioned before, and we have launched ESG investing as a service for banks and wealth managers, in order to meet the growing customer demand for very reliable, detailed data and transparency relating to their investment choices. And this is a solution that is actually based on artificial artificial intelligence. This is how AI is helping unlock more of the potential in sustainable investing by using big data tools to identify sustainable investment opportunities. So, banks by using AI, for example, in asset and wealth management as the basis for impact investing, actually allows them to measure the non-financial impact of their portfolios, and choose the options that fit best with their investment strategy and values. So digital finance, or financial technology, has emerged as a very powerful disrupter that is rapidly reshaping the real economy and the financial sector globally. And this is something that I think will help banks as well as their customers in order to thrive and grow in the new era.
What’s the demand like for sustainable investing through this stage of the cycle?
Kalliopi Chioti: Yeah, it’s true, sustainable investing is on the rise. It is all about investing for the future. It has come a long way. But now it has become mainstream. Investing overall is undergoing a long term transformation towards sustainability. And if I can quote, BlackRock’s Chairman and CEO, I think he’s saying that climate risk and transition risk are going to impact every portfolio across the board. So we see that more institutional investors recognize ESG factors as the drivers of value. The key to investing effectively is to integrate these factors across the investment process.
At the same time, we also see customers, as well as companies that are progressively becoming more and more environmentally conscious of where they’re spending and investing their money. And this is particularly true for millennials who are voting with their wallets and choosing banks that represent their values. Imagine them as the generation that is going to receive $68 trillion in inherited wealth by 2030, so banks cannot afford to ignore them. Sustainable investing is expected to be the new norm.
As all stakeholders recognize the importance of sustainable investing, a range of different investment products and opportunities have appeared in the market. I cannot say that all of them are as sustainable as others, as sustainability standards and data are still evolving. Since this is a fairly new area that has been developed the past few years, there’s still more to see around it. But we see that in terms of sustainable investing, artificial intelligence allows banks to measure the non-financial impact of their portfolios and choose the best solution for their investment strategies and values. Still, there is more to see in that field as we need more standardization among sustainability standards and in data overall.
First published in Tearsheet: https://tearsheet.co/the-green-finance-podcast/the-green-finance-podcast-ep-8-how-technology-could-enable-sustainable-banking-with-kalliopi-chioti-chief-esg-officer-at-temenos/