Unlock the data dividend     |     Standards and systems     |     Rebirth of digital ledgers     |     Putting it to work     |     Emerging opportunity

Everybody is clamouring to embed ESG criteria into their investment and product development decisions. Given the experiences gained from COVID-19, they want to be able to verify that data virtually. No wonder banks, insurers and asset managers are looking for a more effective approach to collecting and sharing verifiable ESG data.

As this edition of Frontiers in Finance seeks to make clear, financial services firms of all shapes and sizes are looking for ways to include a wider range of ESG data into their decision-making. Some are simply seeking to properly quantify their broader carbon footprint for management and reporting. Others are creating sophisticated new ESG-based products they hope will drive their next wave of growth.

The problem is that ESG data — generally speaking — is inconsistent, poorly verified and non-standardized. As yet, there are no international accounting standards for ESG data; verification and audit approaches remain inconsistent; few smaller companies report any ESG metrics at all.

Consider what a 'new reality' economy would look like if everyone in a value chain – or, more accurately, an economic community – were able to see real-time, verified ESG data on their suppliers and counterparties.

COVID-19 demonstrated further weaknesses in the collection and sharing of ESG data. With international travel halted and jobsites locked down, traditional verification and audit processes were disrupted. Getting verifiable ESG data in time to make smart investment decisions became exponentially more difficult.

Not surprisingly, many bank, insurance and asset management leaders are now increasingly concerned they may not have the right data at the right quality and timeliness to allow them to truly embrace ESG in the recovery ahead.

Unlock the data dividend

Consider what a 'new reality' economy would look like if everyone in a value chain — or, more accurately, an economic community — were able to see real–time, verified ESG data on their suppliers and counterparties. A massive number of new value propositions and product opportunities would be instantly unlocked.

Banks, for example, could create products that provide financing to asset producers who follow certain sustainability or environmental standards. Asset managers could provide real–time data on the actual carbon footprint of their impact investments. Insurance companies would be free to offer premium discounts to those customers able to demonstrate certain certifications or levels of standards compliance.

Creating enabling standards and systems

There are two big challenges that must be overcome to achieve this utopia. The first is to get international standard setting bodies and governments to come together to agree on a consistent global set of ESG measures and certifications that could be used by all parties to measure ESG risk and impact. Progress was just starting to be made on this front; refocusing attention post-COVID-19 may take time. To learn about the initiatives underway, please read our article Towards consistent and comparable ESG reporting.

The other major challenge is to find a way to share that data, in real-time, across all parties in the respective economic community. Recently, we have started to see some exciting new solutions emerge. Perhaps the most promising are those enabled by digital ledger technology (DLT).

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5 things to know about using DLT to manage ESG data

The rebirth of digital ledgers

You may know DLT by its most popular technology — blockchain. As cryptocurrencies like bitcoin stormed into the public consciousness, blockchain gained prominence as the enabler of the new gold rush. But as the air seeped out of the cryptocurrency bubble, blockchain’s reputation fizzled along with it.

Yet, over the past decade, blockchain (and other DLT technologies) have proven they are not a one–horse show. The underlying concept — creating an immutable, real-time, distributed and verifiable shared database of tokenized assets — remained sound. More and more, companies were finding that DLT could help them solve some of their more complex data challenges.

It’s already here

In this respect, financial services firms have not been laggards. We are aware of a number of banks, insurers and asset managers who already have DLT or blockchain solutions embedded into their operating models. However, for the most part, these investments and deployments have been largely internally-focused — aimed at improving data sharing across the enterprises’ more complex business processes (some, for example, are using blockchain to speed up inter-branch foreign exchanges across global lines of business).

Those who tend to stake their reputations on innovation are making even bigger moves. JPMorgan, for example, has created a Blockchain Center of Excellence to explore new use cases and to pilot new solutions.1 HSBC recently announced that it was moving more than US$20 billion in assets onto a blockchain-based custody platform sometime this year.2

We believe the next step will see leaders apply these capabilities to helping the business set up, evaluate and monitor counterparties’ ESG-verifiable data assets.

Putting it to work

The beauty of using DLT and blockchain is that it can be combined with a range of other emerging technologies to enable exactly the type of digitized, verified, tokenized, data-sharing platform that banks, insurers and asset managers so desperately need to unlock innovation around ESG criteria.

Unfortunately, it’s not as easy as going out and buying the latest off-the-shelf blockchain solution (and there are many). Indeed, our experience working with a wide range of companies to create economic community DLTs and blockchains suggests they require significant tailoring and strategic thinking to ensure they fit the use cases they will enable.

We believe the next step will see leaders apply these capabilities to helping the business set up, evaluate and monitor counterparties’ ESG-verifiable data assets.

The approach to building a DLT of ESG data around, say, rainforests in Borneo that are being tokenized and traded as carbon offsets would be entirely different to one being created around ensuring that development sites in Mexico are following environmental regulation, for example. Some tailoring would also be required to ensure the solution takes into account local regulations, language differences and capabilities.

An emerging field of opportunity

The good news is there are a number of companies (KPMG member firms included) working to develop a wide range of localized use cases that aim to enable financial services firms to quickly and easily set up the type of ESG data sharing platforms they will require to expand into this emerging area.

Given the ongoing disruptions created by the COVID-19 health and economic situation, KPMG professionals firmly believe that much more must be done to explore how DLT and blockchain-enabled platforms might help banks, insurers, asset managers and — critically — oversight bodies, overcome their current ESG data gaps.

We hope companies will continue to explore the ‘art of the possible’. But we also encourage international standards setters and governments to come together to see how these technologies can be leveraged to create a level of confidence and consistency in the growing ESG market.