EXCLUSIVE: “Going to x-tremes” – André Casterman, Intix in ‘The Fintech Magazine’
Financial institutions have long been required to monitor transaction data. But now both regulators and stakeholders are demanding insight on a wider range of issues, the volume of information and analysis demands a new approach, says Intix‘s Andre Casterman
Legislation typically lags innovation in the digital age and that assertion is clearly true in the case of environmental, social and governance (ESG) investing. By 2020, global ‘sustainable’ funds that sat under the ESG umbrella totalled $35.3trillion, accounting for a third of the value of all professionally managed assets, according to investment research group Morningstar. While many of these complied with voluntary codes of reporting, such as that laid out by Global Reporting Initiative, it’s only recently that we’ve seen mandatory rules around ESG reporting being introduced.
For instance, in March 2021, the Sustainable Finance Disclosure Regulation (SFDR) went live in the EU to improve transparency in the market for sustainable investment products, to prevent greenwashing and to increase transparency around sustainability claims made by financial market participants. The UK government’s first wave of Climate-related Financial Disclosure Regulations came into effect for publicly quoted companies, banks, insurers and large private companies in April 2022.
The UK is expected to adopt the International Sustainability Standards Board requirements for disclosures over climate and general ESG reporting by 2025, which must be linked to financial statements. And, in the US, the Securities and Exchange Commission released its consultation in March 2022 on a requirement for companies filing there, (including private foreign companies) to report direct and indirect emissions. ESG is huge, complex and highly political – and it’s about to drop a vast regulatory burden on businesses around the world.
“ESG is going to be as important as the compliance trend that we witnessed following the financial crisis of 2008,” says Intix’s André Casterman, which has a client portfolio consisting of Tier 1 banks across the world.
“It’s nascent – it hasn’t impacted all the bank systems yet – but, at the same time, climate change is a priority for the world. And it’s a priority for the regulators who are creating many new obligations on banks to handle ESG data.
“Whether this is related to an ESG scoring at a company level, or an ESG scoring at a transaction level, all of this data has to be stored, kept, archived, and be part of the decision-making within the banks.”
While some of the latest regulation is specifically concerned with understanding the size of the risk and protecting systemically important institutions from financial shocks caused by climate change, more broadly, the environmental component of ESG means a financial institution must consider how its actions – and, indeed, those of its suppliers and customers – impact the natural world, and come up with a strategy to mitigate it.
When it comes to meeting social responsibility obligations, a company needs to look at how its own, and potentially others’ management of relationships up and down the supply chain, affects individuals and communities. Governance, meanwhile, is something most companies have paid closer attention to following the Cadbury report in the 1990s; it requires them to demonstrate probity in leadership, auditing and internal controls. The data needed to demonstrate regulatory compliance and satisfy internal reporting to stakeholders on the ‘E’ and ‘S’ in ESG requires institutions to gather information from disparate internal and external sources. That data is often hidden in a long-tail supply chain and often it will be qualitative by nature.
As Casterman points out, environmental reporting is comparatively new and has already sparked huge criticism by both supporters and detractors. There have been claims of ineffectiveness and greenwashing from environmental activists, while recently, during the US Congress mid-term elections, some Republicans went so far as to allege that ESG was part of a woke agenda by left-wingers. In October it was reported that US investment giant BlackRock had lost more than $1billion in asset management business in Republican-run states where treasurers were opposing its green investment policies.
Environmental reporting is particularly fraught because there is as yet no universally agreed rating system against which to peg a company’s performance. Industry giants such as MSCI, Standard & Poor’s, Moody’s, Institutional Shareholder Services and Bloomberg provide ESG metrics but so do scores of others. Whatever the protocol, the importance of these metrics is not lost on financial institutions: KPMG said recently that many in the UK were already transitioning their ESG data and reporting teams into finance ‘so that the same rigour can be applied to these metrics as to the reporting of financial information and disclosures‘.
The big data exchange The sustainable investment revolution could transform businesses for the better, and demand for such products seemingly outstrips supply.
A PwC study in October 2022 claimed nearly nine in 10 institutional investors believe asset managers should be more proactive in developing new ESG products, yet only 45 per cent of asset managers had new ESG fund launches in the pipeline. The UK investment market has already noted and is acting upon the unmet opportunity: London aims to become the world’s first net zero-aligned financial centre. For Casterman, all this points to one truth: “Across multiple streams –securities, payments, trade, and so on – more and more data will have to be exchanged for organisations to be ESG compliant.”
Intix was acquired in March 2022 by Summa Equity, which invests in companies that are solving global challenges and creating positive ESG outcomes. Superior automated data gathering and analysis, such as that offered by Intix xTRAIL and xTRACE data tracking solutions and now xCOMPLY will go a long way to helping them achieve that. xTrace and xTrail already allow firms to view all their transaction data in a unified graphic user interface as well as in machine-readable APIs. But xCOMPLY combines that transaction data with many more data sets to deliver contextual insights that support compliance with a wider range of regulatory obligations and financial forensics. That includes ESG reporting.
“Whether it’s an ESG dataset, an anti-money laundering dataset or another type such as a master dataset, with xCOMPLY we can correlate them. Compliance officers will benefit, but it has other uses in the organisation, such as business or client support functions.”
“ESG is going to be as important as the compliance trend that we witnessed following the financial crisis of 2008”
Pointing to the growing complexity around data management, Casterman adds: “More and more internal systems within banks are being added, one next to the other. Different screening systems are run for payments, for securities, for trade, and all the requirements are different. The challenge for banks is to navigate through datasets that are scattered across these systems, and that’s what we enable – we provide a single window into the internal systems of the bank.
“We can add additional datasets as needs evolve without having to change our platform. Being adaptable, configurable, to address additional needs from regulators, or as the market evolves, is a key aspect of our technology.”
Casterman believes the current fragmentation of payment systems will only add to the volume of data held by any one institution, which makes the case for automation even harder to resist.
“There are not only new entrants competing on cross-border payments but also we see the world dividing,” he says. “This year, we saw Swift disconnecting countries due to political decisions, which means there will be more systems used to process payments. So, banks have to connect to a number of channels, whether they like it or not. And they will have to internalise as much data as possible because whereas, in the past, they could let some data be handled by those channels, such as analytics and reporting, they can no longer rely on this.
“At Intix, whatever channel the bank is using, we are always focussed on the payment, securities or trade transaction data, and we process it independent of the formatting of the instruction – MT or ISO 20022, or any other standard.
“We can provide the data for both automated and manual processes, but the key is for the bank to automate as much as possible to avoid compliance officers having to do all their linking manually because we know that leads to operational risks and errors.”
Intix has been advising clients on how to get their data in order for years, and now that regulators have a better understanding of the datasets available and their demands are becoming more specific, that advice is coming home to roost – not least because when it goes wrong for financial institutions, the fines and potential reputational damage can be severe.
“The way banks need to report transactions for regulators is undoubtedly becoming more complex,” says Casterman. “Regulators also want faster reporting – it’s no longer end-of-month. Everything has to be real-time. “When it comes to conducting forensic investigation, every piece of data counts. You want to know everything around the parties involved, around the transaction, its origin – is it coming from a securities settlement, or a trade settlement or just a regular payment?”
Those are the questions that clients will, he hopes, come to rely on xCOMPLY to answer.
But whether it’s information required under the ‘single EU rule book’ for anti-money laundering/countering terrorist financing – as is currently being discussed – or gathering the data to justify investment in a company that may or may not be greenwashing, Casterman says: “Our technology is ready for any change that the banks will have to go through.”
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