The macroeconomic environment is undoubtedly today’s main discussion topic in the wealth management, banks and insurance industries. However, it’s fair to say that the threat of climate risks is not far behind. As Cop28 concluded in Dubai on November 12, one of the key themes discussed was the critical role of technology in reducing emissions, underscoring the urgency and significance of the fight against the escalating climate crisis as well as the need for higher standards globally.
Companies across all industries are increasingly seeking robust solutions to manage and report their sustainability performance as Europe strives to meet the central objective of the European Green Deal. With the rise in ESG regulations set by the European Union, the US Securities and Exchange Commission, and the International Sustainability Standards Board, environmental consciousness and corporate responsibility are now at the forefront of business considerations.
Furthermore, investors place more trust in companies that take steps to address risks and opportunities associated with climate change. A PwC survey found that seven in ten investors prefer companies that report on sustainability’s relevance to strategy, the cost of meeting sustainability commitments, climate goals and the effects that sustainability risks and opportunities have on assumptions behind the financial statements.
Sustainability reporting is more than a box-ticking exercise. Companies’ disclosures of ESG metrics and KPIs should be assured at the same level as a financial statement audit. Reliability of reported information is key. This is where sustainability analytics technology comes into the spotlight. In our recent podcast, Zaliia Gindullina, Head of Business Development and marketing expert Natalie Burke spoke to Celina Borg, sustainability adviser from Wellfish, about the latest news in tracking, measuring, and managing sustainability performance.
A pivotal moment in the evolution of sustainability reporting is the enforcement of the Corporate Sustainability Reporting Directive (CSRD) by the European Union which was published in December 2022. This directive, replacing the Non-Financial Reporting Directive (NFRD), signifies a significant step toward unified and comparable reporting standards. The CSRD's introduction is a response to the lack of homogeneity and comparability in existing reporting frameworks, providing a more structured and mandatory approach to sustainability reporting.
The CSRD requires that companies adopt a double materiality perspective, aligning with European sustainability reporting standards. Borg elucidates that this involves analysing sustainability areas that impact the business and understanding where the business itself has an impact. The aim is to focus sustainability reporting on areas that matter most to the specific company, fostering relevance and reliability in reporting. This means to analyse sustainability issues such as climate change and biodiversity loss, relate them to the company’s financial opportunities and risks, as well as its impacts on society and the environment.
Companies subject to the directive must have their sustainability disclosures assured by an outside party. The resulting improvement in credibility should help executives, boards, and investors engage in more meaningful discussions and reach more confident decisions.
According to Borg, in many cases, sustainability reporting is often cluttered with operational measures that lack financial or strategic context.
Wellfish is committed to providing a comprehensive sustainability management system, going beyond traditional annual reporting. Wellfish's unique selling point lies in its integration with bookkeeping systems, providing a seamless link between financial and sustainability data. For example, the carbon dioxide emissions are calculated based on the firm’s financial data, which coefficients sourced from government agencies and reliable data providers.
Apart from automated climate calculations, Wellfish services include a tool for double materiality assessments, data collection, and an action plan component for tracking sustainability commitments. The emphasis here is on continuous monitoring and management of sustainability performance rather than a once-a-year reporting exercise.
Borg notes that collaboration with accounting agencies is central to making sustainability reporting an integral part of the annual financial report. The convergence between financial and sustainability reporting, she believes, is inevitable and crucial for a holistic understanding of a company's performance.
As sustainability reporting becomes a mandatory part of annual financial reporting, the collaboration between financial and sustainability reporting sectors will be pivotal. It's not just about compliance but about presenting a transparent and comprehensive picture of a company's health and longevity.
Moreover, according to Kroll’s ESG and Global Investor Returns Study, companies with higher ESG ratings earned an average annual return of 12.9%, compared to an average 8.6% annual return earned by those falling behind. This represents an approximately 50% premium in terms of relative performance by top-rated ESG companies. Although it can be argued that the connection is reverse – that better-performing firms have an opportunity to fund and improve their sustainability scores, the investments in social, governance and climate aspects of the companies' lives are likely to be favourable for long-term growth. Therefore it leaves no doubt that the demand for technology tools which assist with data-gathering processes, ESG disclosure attestation and assurance services will escalate.
The data generated through sustainability reporting is not just a compliance requirement; it's a tool for driving tangible change internally as well as externally. Borg shares insights into how Wellfish clients such as Fortnox and AutoRedovisning, among others have leveraged sustainability reports for competitive advantages in tenders, cost savings, and even employee retention strategies.
Moreover, with the increasing demand for sustainable investments, companies using Wellfish's services have become more mindful of their climate footprint. This shift in awareness has led to changes in operational practices, showcasing the transformative power of sustainability reporting.
In addition to stringent regulations on sustainability reporting, customers are increasingly concerned about the environment and prefer to invest in companies that share their values like reducing emissions, eliminating or recycling waste in supply chains, and reducing the overall carbon footprint making it essential for wealth managers and advisers to actively measure and manage how they their customers’ holdings are performing on ESG metrics.
There are several ways for the wealth management, bank and insurance industries to approach this. First, wealth managers/advisers accommodate the demand for sustainable investments from a customer’s perspective. Some of Kidbrooke®’s clients have already implemented digital pensions and savings journeys where their customers are encouraged to choose how much they care about sustainability in their investments. Then the adviser forms the recommendations that are suitable to customers’ financial and sustainability goals. Kidbrooke® enables their clients to do this in several ways. First, the financial analytics provider helps them with sustainability data management and processing. Second, Kidbrooke® ensures that their financial simulation engine is flexible enough to accommodate the sustainability factors in its decision-making functionality.
Second, both investment managers and financial advisers should be prepared to analyse different scenarios of future economic development given climate change, its potential severity and several possible ways humanity mitigates it. Kidbrooke®’s ongoing work with IPCC climate scenarios plays an important role in this domain. Kidbrooke® equips its economic scenario generator with various possible scenarios of how climate change would impact the economies so the industry could make more informed financial decisions from their analysis. It is increasingly important in the investment context that sustainability performance isn’t viewed as just a snapshot of the situation but rather as a dynamic journey towards meeting ESG targets.
Wellfish envisions expanding its services to include forecasting and risk management within a sustainability context. Borg acknowledges the need for collaboration with the financial sector to enhance their capabilities in these areas. The convergence of financial forecasting and sustainability insights is seen as a natural evolution, allowing companies to make informed decisions about their long-term investments.
Wellfish's journey reflects the dynamic nature of sustainability reporting, evolving from a nice-to-have practice to a mandatory and integral part of corporate reporting. As regulatory frameworks tighten and expectations rise, companies are turning to advanced software solutions like Wellfish to navigate the complex landscape of sustainability and Kidbrooke® is definitely one of them. The convergence of financial and sustainability reporting is not just a trend; it's a necessity for companies aspiring to thrive in an era where transparency and responsibility are non-negotiable. By actively navigating the continuous regulatory complexities around sustainability through data collection and accurate reporting, companies can forge a transformative path without sacrificing valuable time.