Sustainable finance: ESG data challenges and tech solutions

In Mimacom’s Stay ahead Podcast, Fabian Schneider talks with his guests Dr. Samy Amara from mintminds and Dr. Hans-Peter Güllich from Dydon AI about the challenges of banks and financial service providers in the context of sustainable finance as well as the technical solutions in the field of automation and digitalization that are already available today.

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The topic of sustainability has been on the EU agenda for a long time and in Switzerland, too, the government, regulators, and the banking association are dealing with it. To decipher the high level of complexity a little, we invited two experts in this field to exchange views with Fabian Schneider, Regional Manager of Mimacom AG in Zurich:

Dr. Samy Amara is a partner at mintminds and advises banks on the introduction and further development of sustainability solutions. Through his implementation projects, he is very familiar with the challenges faced by banks and financial advisors.

Dr. Hans-Peter Güllich is the founder of Dydon AI, a software company that provides AI solutions for processing and automating ESG and EU taxonomy assessments for banks and companies. The Taxo Tool solution was awarded the Innovation Award by Stanford and Zurich Universities and was twice named “Best Taxonomy Data Solution for ESG” by the A-Team Insight Award.

Challenge: Coexistence of regulatory systems

With regard to sustainability reporting, there are a multitude of rules ranging from global industry standards to regional and national regulations. Therefore, Fabian Schneider first asked his guests for a corresponding overview.

To this end, Dr. Samy Amara explained that globally 17 Sustainable Development Goals (SDGs) have been agreed upon, which have been operationally implemented through various standard organizations. Furthermore, in 2018, the European Commission introduced the Action Plan on Sustainable Finance, which contains various packages of measures (SFDR). A key point here is the disclosure requirements for companies under the Corporate Sustainability Reporting Directive (CSRD), although the metrics and indicators defined there differ in part from the SDGs.

“The difficulty for banks and financial service providers lies in the coexistence of different systems, indicators and metrics in the ESG field,” says Dr. Samy Amara. In addition to the requirements of the SFDR, which apply both at the company or institution level and at the product level, MiFID must also be taken into account, according to which clients must state their preferences regarding the type and scope of sustainable financial instruments in which they wish to invest. MiFID and SFDR are also relevant for Swiss banks and financial service providers if they have EU clients or create or distribute sustainable products in the EU.

Dr. Hans-Peter Güllich refers to the importance of the Paris Climate Agreement and how the EU taxonomy aims to steer financing towards environmentally sustainable activities. To this end, legal and technical criteria have been defined to determine what counts as compliant with the EU Taxonomy. These include above all specific limit values that are set for certain economic activities (for example: how much CO₂ may be produced in the production of one ton of cement?). Dr. Hans-Peter Güllich adds “We keep hearing that this regulation is “enormously complex” – yes, it is, but it is also necessary in order to get a grip on the complex issue of “sustainability”.”

Application of ESG rules in the investment and lending area

The interlocutors further discuss the application of these rules and standards at EU and national level, especially in Switzerland, where implementation often takes place at the institution level.

With regard to the application in the investment sector, Dr. Samy Amara emphasizes: “We have very different indicators and thresholds that have to be operationalized. We need a consistent investment process.” Investments or issuers must meet certain requirements in order for an investment in the respective company to be considered “sustainable”. In addition, the categories of sustainable investments are specified by MiFID or SFDR, to which specific disclosure obligations are then linked. An investment can belong to one or more categories. For example, it can take into account adverse environmental impacts by meeting certain thresholds, such as GHG emissions, and at the same time belong to an SFDR product category.

“In the credit sector, it works in a similar way,” adds Dr. Hans-Peter Güllich. “Here, the processes differ according to whether it is an earmarked loan – which relates to a specific economic activity, for example the financing of a photovoltaic system – or whether it is an uncommitted loan, i.e. a corporate loan. In the latter case, the ratios are checked per company, and at the same time each individual economic activity of the company must also meet the requirements of the EU Taxonomy regulation.”

Technological solutions for the collection, validation and processing of ESG data

The variety of data is enormous and must be integrated into the entire value chain. The challenges in data processing should not be underestimated. Different data sources – from publicly available to third-party providers to social media – and continuously changing information requirements make a very well-trained solution necessary. “Key figures and rules will continue to evolve and we need a flexible system that can adapt to the development,” underlines Dr. Samy Amara.

Dr. Hans-Peter Güllich explains how his company, Dydon AI, uses artificial intelligence (AI) methods to extract information from different documents and perform automatic validations. “AI technologies support easy and automated data collection from a wide variety of sources, which can improve or maintain data quality.”

Workflow automations such as Mimacom’s Flowable solution as a Business Process Automation Platform play a crucial role in processing ESG data. “Workflow automation like Flowable has enormous potential to automate product categorization,” says Dr. Samy Amara. He agrees with Dr. Hans-Peter Güllich that automated processes for data collection, validation, and processing of ESG data can increase efficiency and ensure compliance. Such automation can help investors and financial institutions define clear sustainability goals and ensure that their portfolios meet established standards.

Multiple advantages of workflow automation and data integration

The benefits of workflow automation and data integration are many. In addition to increasing efficiency, they enable compliance with standards and provide rapid identification of potential reputational risks. This is particularly important as sustainable finance takes on increasing importance and reinforces transparency and accountability in the financial sector.

“Technological solutions in the field of sustainable finance can help banks and financial service providers keep pace with the complex requirements of regulations and standards,”Fabian Schneider summarized the conversation. Workflow automation, AI, and data integration enable efficient data collection, processing, and validation while ensuring that investments meet desired sustainability goals. The financial sector can thus better fulfill its role in promoting a sustainable economy.

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The interview was conducted by Fabian Schneider, Regional Manager Zurich of Mimacom AG.

Guests: Dr. Samy Amara, Partner at mintminds and Dr. Hans-Peter Güllich, CEO & Founder of Dydon AI