Regtech Can Be a Greenwashing Killer (If We Allow It)

Image credit: iStockphoto/scanrail

When considering how they allocate their capital, global investors are increasingly factoring in Environmental Social and Governance (ESG) issues. But they have a problem with greenwashing.

With standards hazy and data incomplete, it has been relatively easy for fund managers, startups, and also established corporates pitching for investment dollars to talk up their ESG credentials with little to back it up, apart from some nicely-tailored spin.

In the pushback against greenwashing, the still-emerging regtech industry has a significant opportunity. Regtechs can not only drive compliance and help corporates understand and measure risks, but in collecting data and delivering, they can also play a role in understanding ESG performance and if corporates’ talk matches their walk.

As several new initiatives demonstrate, the regtech industry is waking up to this ESG opportunity. ESG was the topic for a webinar held by Australia’s RegTech Association last week. Participants discussed the importance of ESG to startup regtechs as they pitch to investors and the broader opportunity regtech companies have in enabling better ESG outcomes for their clients.

In Singapore, regtechs were embraced late last year in the city state’s efforts to combat greenwashing and help promote sustainable finance. The managing director of the Monetary Authority of Singapore, Ravi Menon, told a conference late last year that four data platforms would be created to help companies with their disclosures and manage and process ESG data under the city’s Project Greenprint.

The government will help the banks and fintech firms to develop AI tools to back the platforms, one of which is a common disclosure portal created with the Singapore Stock Exchange. A “data orchestrator” would take information from various vendors and trusted sources, aggregate it, and then apply analytical tools, all of which are accessible through an ESG registry.

Technology vision

Meanwhile, in Hong Kong, a whitepaper from the Fintech Association of HK is the most extensive yet to lay out a vision on how technology already in use for anti-money laundering and know your customer (KYC) applications can be extended to ESG reporting.

Critical challenges for sustainable investing, according to the whitepaper, are “insufficient reporting and disclosure and inconsistent presentation and measurement of environmental data among companies and investment." These prevent investors from making a meaningful comparison and an informed decision. Data is key to addressing these challenges.

“Increasing disclosure requirements will increase regulated entities compliance burden, but technologies may help ease their burdens”

The whitepaper outlines four areas in which regtech can help. They include:

  • Social media, eco-labeling, and blockchain technologies for combating greenwashing
  • Blockchain for land registration for decreasing green investment risks
  • Using data technologies, such as cloud and machine learning, for the disclosure, comparison, and monitoring of climate risk and environmental data
  • Employing data technologies and statistical tools, such as scenario analysis, simulation, and stress testing, to enhance risk management and governance frameworks

On the application of blockchain in land registration (the second area), the whitepaper makes the point that according to the World Bank, more than 70% of the world’s population lacks a ‘legally registered’ title to their land. Only one-third of countries worldwide track property ownership digitally, which is critical for effective land management.

Projects such as forestation and biofuel require a substantial upfront investment. If landowners' ownership is not recognized, they are less likely to invest in their property.

In Ghana, for example, over 80% of land titles lack the documentation to prove ownership. It is common for land already owned by someone to be sold off by another person, and multiple people can be under the impression simultaneously that they own a piece of land exclusively.

A regtech solution has been offered by BenBen, which has created a land registry and verification platform for financial institutions. The platform captures transactions and verifies the data and works with financial institutions to update current registries, enables smart transactions, and distributes private keys for clients to allow property transactions between parties.

In the area of disclosures, the whitepaper says, “increasing disclosure requirements will increase regulated entities compliance burden, but technologies may help ease their burdens.”

“Technologies, including big data, artificial intelligence, mobile platforms, cloud, blockchain, and the Internet of things, can help businesses and investment managers disclose climate risk and relevant environmental data and help investors and asset managers compare it,” it adds.

Technologies allow data to be collected automatically during business operations. Applications are being developed to integrate and transform data from these vehicles into data for calculating KPIs with little effort.

Technologies can also securely convey and store data. Data storage and processing and algorithms are essential to scenario modeling regulators, and investors increasingly want to understand compliance and risk.

Sustainability agenda

With impact investment gaining increasing momentum and regulators demanding more in the way of disclosures, organizations have a robust set of imperatives to invest in smart regtech solutions that satisfy compliance and showcase ESG credentials to attract investment support.

As the whitepaper notes, the OECD estimates that as much as USD7 trillion will be needed each year up to 2030 to meet climate and development objectives, while Bloomberg estimated that the global ESG assets are on track to exceed USD53 trillion by 2025.

“The market in green finance is expected to grow exponentially building on the increasing investment opportunities and demand, supportive government policies, strong expertise, and robust green bond infrastructure,” it says.

The enabler to all this is smartly deployed regtech, which has an opportunity to not only create a vibrant and sustainable industry but help the world implement the broader sustainability agenda.

Lachlan Colquhoun is the Australia and New Zealand correspondent for CDOTrends and the NextGenConnectivity editor. He remains fascinated with how businesses reinvent themselves through digital technology to solve existing issues and change their entire business models. You can reach him at [email protected].

Image credit: iStockphoto/scanrail