Financial Services Technology Panel continues its ESG quest

We promised a series of events to explore the importance of Environmental, Social and Governance to our society in general and to the Financial Services sector in particular. Our third event on “Self Assessment Versus Regulation” saw another expert panel debate the issue, with an audience drawn from the Livery movement, Academia, Financial Services and others new to WCIT, illustrating the huge interest in the ESG movement and confirming that the WCIT focus, with its Social Value initiative and FS Technology Panel ESG series, is the right one for our times.

“Environment, Social and Governance – Self Assessment Versus Regulation took us through the arguments and we learned that they are not straight forward.

Rebecca Healey, our chair, set the scene by telling us that ESG is moving from niche to mainstream and that data and access to it “will go on steroids” referring to a data lake that consumers can access directly and highlighting the challenge for regulators as well as investors.

Sally Bridgeland, in a surprising view from an actuary told us that, while data is critical, it is far from the only important factor, and characterised it rather as a catalyst for action. She emphasised the need for meaningful interpretation of data, of the difference between data and knowledge and warned that, while moving to regulation may be useful, one size does not fit all.

Vivian Frost used Sustainalytics flag ship ESG Risk rating methodology to highlight how it is not just about companies’ own data, how AI is used to take in data from many sources, including unstructured data, and underlined the importance of distinguishing between material and immaterial disclosure by companies. Her conclusion was that it is very important to understand the quality of disclosure and scoring, and she called for transparency throughout the process.

Faisal Rafi, who spends his time researching Fund Managers, talked to us of the complex challenges they face, positing that some regulation is needed. His view is that fund managers are researching companies in themselves and challenged accounting bodies to step up and create standards. Faisal’s warning, echoing Sally’s one size does not fit all message, was that it is time to move away from using ESG for binary judgements to incorporating it into the process for evaluating the worth of a company.

Prof Alex Edmans asked the controversial question “does ESG actually pay off?” and warned of confirmation bias. He developed the idea that Purpose leads to Profit, looking at materiality as a driver and giving the example of companies that look after their employees outperforming their peers. He encouraged us to look at what drives long term success, introducing the importance of intangible, qualitative factors. His key message was that companies that outperform others score highly on material issues and these differ from company to company and industry to industry.

Prof Rajkumar Roy brought a new perspective on the question of Regulation Vs Self Assessment, focusing on the outcomes we want to achieve, and asking what impacts those outcomes most. He defined ESG as a movement, not bound by a few metrics, that needs cultural change – something he first developed in his 2004 in the report he ceded “Who Cares Wins”. He challenged the Financial Services industry on whether we would accept financial exclusion and told us that the ESG movement requires the development of socially responsible professionals along with leadership, as the City University, London is doing. He cited the developing problem of complex data algorithms and the need for mathematical rigour, urging us to do what we can to develop data we can trust, acknowledging a need for some regulation.

We learned so much during this session and, as our Chair summarised, it seems that we should focus on Principles, rather than Prescriptive, based regulation. And our debate moved opinion again! At the beginning our debate 74% of our audience voted Yes to regulation, moving to only 19% by the end, with 60% saying YES but laterThe No vote moved too –from 21% at the start up to 26% at the end.

Rob Wirszycz, the WCIT Junior Warden rounded the event off by coining yet another phrase – “consequentiality” – based on materiality – meaning the extent to which it matters to companies to be involved in operating to ESG principles and reflected on the power of employees to choose. He likened regulation to a hammer, that could be a sledge hammer or a light “tap and nudge” influencing force and asked if we need to “raise the floor” for all or “touch the ceiling” in a competition. The WCIT Social Value Leadership Group (SVLG) of 12 companies, that Rob leads, aims at raising standards and finished by saying that ESG now a movement that has a name!