Unlocking the power of ESG data

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Unlocking the power of ESG data

Jason Davis is a senior associate of innovative finance at the Milken Institute. Ella Tan is an associate at the Milken Institute Asia Center’s Policy & Programs team.

Addressing environmental and social challenges has become a global call-to-action as every region pursues its vision for sustainable business models. In Southeast Asia, the financial sector plays a critical role in tackling those issues by directing capital to businesses and projects that pave the way for a more sustainable future. Financial institutions (FIs) cannot do this without access to the correct data to achieve their business goals, specifically environmental, social, and governance (ESG) data.

What exactly does ESG data entail? Environmental (E) data includes information on businesses’ carbon emissions or their consumption of natural resources during a production process. Social (S) data looks at how a company handles business relationships and labor rights. Lastly, governance (G) data tells us about a company’s ethical standards. For example, how their policies and procedures guard against unethical business practices like bribery or corruption.

International banks and asset managers commonly incorporate ESG data into their business and investment decisions. When evaluating a business, they look beyond typical financial metrics and take a more holistic approach when assessing long-term sustainability and how operations affect society broadly. However, some FIs in Southeast Asia seem to have missed the memo.

To understand the importance of broadening ESG integration throughout business units, the Milken Institute gathered insights from 48 experts at global and regional banks, government agencies, and multilateral organizations. The findings are in a report titled Meeting Business Goals through ESG Data Optimization and Technology in Southeast Asia. This research translates to practical steps that FIs can take to meet the moment and successfully incorporate ESG criteria into their business practices.

Notable technology solutions can help FIs access and utilize ESG data efficiently. Tools like AI-powered optical character recognition help digitize historical data with ESG application potential. This allows FIs to maximize the value of data already within their possession — a significant first step.

Firms should also incorporate external information from third-party ESG data vendors. Cloud service providers, like Google Cloud and Amazon Web Services, increasingly offer marketplaces for comparing and engaging vendors while delivering the flexible computing power FIs need to store and analyze large swaths of information. Additionally, implementing repositories for structured and unstructured data (data lakes) is instrumental for effective data processing and analysis. These are all tools FIs can leverage now to jumpstart their ESG adoption journey.

It is key to utilize alternative data sources such as social media platforms, news websites, and other web-based forums where machine learning technologies can quickly vet, organize, and draw actionable ESG insights from unstructured data in near real-time. Earth observation data like satellite and drone imagery is also valuable in providing insights on diverse corporate ESG topics, ranging from asset flood and fire risk to the impact of drought on crop yields. For example, investment research firm MSCI used “geospatial analysis and satellite-derived imagery” and identified major mine-waste dam failure risk in Brazil and the related financial exposure for mining company Vale. Despite self-reporting by Vale in 2017 attesting to stable conditions of their mine-waste dams, a significant collapse killed 270 people at their Córrego do Feijão mine in 2019, with liabilities amounting to $5 billion. Alternative datasets provide a more reliable understanding of risk than self-reported corporate data alone.

Regulatory pressures have been mounting globally, and FIs need to prepare to embrace ESG disclosure regulations and compliance. Southeast Asia is no exception, with Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam all mandating ESG disclosure or sustainability reporting in recent years. However, many FIs in the region are still in the early stages of their ESG adoption journey. Regardless, mandatory reporting coupled with digitally enabled transparency (such as enhanced traceability with blockchain) drives the need for speedy and robust ESG adoption. The Monetary Authority of Singapore, a leader in this area, is piloting four common-use sustainable finance data platforms, including one that will focus on ESG data disclosure. Prudent FIs would be well-advised to coordinate early with internal and external stakeholders to determine their ESG disclosure procedures and policies.

Shareholder activism, regulatory pressures, and demands from consumers and employees are increasingly pushing FIs to follow through on ESG goals with concrete actions and transparency. Effectively leveraging data and technology will be an essential part of the solution to make such a change possible.

As Southeast Asia moves toward a more sustainable future, businesses will have to comply with new ESG regulations. The time for preparation and implementation is now.
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