EXCLUSIVE: “Going to x-tremes” – André Casterman, Intix in “The Fintech Magazine”

Financial institutions have long been required to monitor transaction data. But now both regulators and stakeholders require insight into a wider range of issues, the volume of information and analysis requires a new approach, says Intix’s Andre Casterman

Legislation typically lags behind innovation in the digital age, and this claim is clearly true when it comes to environmental, social and governance (ESG) investments. In 2020, global “sustainable” funds that sat under the ESG umbrella totaled $35.3 trillion, accounting for a third of the value of all professionally managed assets, according to investment research group Morningstar. Although many of these adhered to voluntary reporting codes, such as those set out by the Global Reporting Initiative, it is only recently that we have seen mandatory rules around ESG reporting being introduced.

In March 2021, for example, the Sustainable Finance Disclosure Regulation (SFDR) was published in the EU to improve transparency in the market for sustainable investment products, to prevent greenwashing and to increase transparency around sustainability claims by financial market participants. The UK government’s first wave of climate-related financial disclosure regulations came into effect for listed companies, banks, insurers and large private companies in April 2022.

The UK is expected to adopt the International Sustainability Standards Board requirements for climate disclosure and general ESG reporting by 2025, which must be linked to financial statements. And in the US, the Securities and Exchange Commission held its hearing in March 2022 on a requirement that companies that register there (including private foreign companies) report direct and indirect emissions. ESG is huge, complex and highly political – and it is about to unleash a huge regulatory burden on businesses around the world.

“ESG is going to be as important as the compliance trend we saw after the 2008 financial crisis,” says Intix’s André Casterman, who has a client portfolio of Tier 1 banks worldwide.

“It is nascent – ​​it has not affected all banking systems yet – but at the same time climate change is a priority for the world. And it is a priority for the regulators, who are creating many new obligations for banks to handle ESG data.

“Whether this is related to an ESG scoring at a company level, or an ESG scoring at a transaction level, all this data needs to be stored, kept, archived and be part of the decision-making process in the banks.”

While some of the latest regulations are specifically concerned with understanding the magnitude of risk and protecting systemically important institutions from financial shocks caused by climate change, the environmental component of ESG more generally means that a financial institution must assess how its actions – and indeed, those of its suppliers and customers – affect the natural world and come up with a strategy to reduce it.

When it comes to fulfilling social responsibility obligations, a company must look at how its own, and potentially others’ handling of relationships up and down the supply chain, affects individuals and local communities. Governance, meanwhile, is something most companies have paid closer attention to following the Cadbury report in the 1990s; it requires them to show honesty in management, auditing and internal control. The data needed to demonstrate compliance and satisfy internal reporting to stakeholders on the “E” and “S” of ESG requires institutions to gather information from various internal and external sources. This data is often hidden in a long-tail supply chain and will often be qualitative in nature.

As Casterman points out, environmental reporting is relatively new and has already drawn enormous criticism from supporters and detractors alike. There have been allegations of inefficiency and greenwashing by environmental activists, while recently, during the mid-term elections for the US Congress, some Republicans went so far as to claim that ESG was part of an agenda awakened by the left. In October, US investment giant BlackRock was reported to have lost more than $1 billion in asset management operations in Republican-run states where treasurers opposed its green investment policies.

Environmental reporting is particularly burdened because there is currently no universally accepted rating system that can be linked to a company’s performance. Industry giants such as MSCI, Standard & Poor’s, Moody’s, Institutional Shareholder Services and Bloomberg provide ESG metrics, but so do many others. Whatever the protocol, the importance of these metrics is not lost on financial institutions: KPMG recently said that many in the UK were already transitioning their ESG data and reporting teams into finance “so that the same rigor can be applied to these metrics as for reporting financial information and disclosures’.

The Big Data Exchange The sustainable investment revolution can transform businesses for the better, and the demand for such products is apparently outstripping supply.

An October 2022 PwC study claimed that nearly nine in ten institutional investors believe asset managers should be more proactive in developing new ESG products, but only 45 percent of asset managers had new ESG fund launches in the pipeline. The UK investment market has already noticed and is reacting to the unfulfilled opportunity: London aims to become the world’s first net-zero financial centre. For Casterman, all of this points to one truth: “Across multiple streams—securities, payments, commerce, and so on—more and more data will need to be exchanged for organizations to be ESG compliant.”

Intix was acquired in March 2022 by Summa Equity, which invests in companies that solve global challenges and create positive ESG results. Superior automated data collection and analysis, such as that offered by Intix xTRAIL and xTRACE data tracking solutions, and now xCOMPLY will go a long way to help them achieve that. xTrace and xTrail already allow firms to view all of their transaction data in a unified graphical user interface, as well as in machine-readable APIs. But xCOMPLY combines this transactional data with many more datasets to deliver contextual insights that support compliance with a wider range of regulatory obligations and financial investigations. It includes ESG reporting.

“Whether it’s an ESG dataset, an anti-money laundering dataset or another type like a master dataset, with xCOMPLY we can correlate them. Compliance officers will benefit from that, but it has other uses within the organization, such as business or customer support functions. »

“ESG is going to be as important as the compliance trend we saw after the financial crisis in 2008”

Casterman points to the increasing complexity around data management, and adds: “More and more internal systems in the banks are being added, next to each other. Different screening systems are run for payments, for securities, for trading, and all the requirements are different. The challenge for the banks is to navigate through data sets that are scattered across these systems, and that is what we make possible – we provide a single window into the bank’s internal systems.

“We can add more datasets as needs evolve without having to change our platform. Being adaptable, configurable, to meet additional needs from regulators, or as the market evolves, is a key aspect of our technology.”

Casterman believes the current fragmentation of payment systems will only increase the amount of data held by an institution, making it even more difficult to resist automation.

“Not only are new players competing in cross-border payments, but we also see the world dividing,” he says. “This year we saw Swift disconnect from countries due to political decisions, which means there will be more systems used to process payments. So banks have to connect to a number of channels, whether they like it or not. And they must internalize as much data as possible, because while previously they could let some data be handled by these channels, such as analytics and reporting, they can no longer rely on this.

“At Intix, no matter which channel the bank uses, we are always focused on payment, securities or trade transaction data, and we process it regardless of the format of the instruction – MT or ISO 20022, or any other standard.

“We can provide data for both automated and manual processes, but the key is for the bank to automate as much as possible to avoid compliance officers having to do all the linking manually because we know that leads to operational risk and errors.”

Intix has been advising clients on how to get their data in order for years, and now that regulators have a better understanding of the data sets available and their requirements are becoming more specific, that advice is coming home to rest – not least because when if things go wrong for financial institutions, the fines and potential reputational damage can be severe.

“The way banks need to report transactions to regulators is undoubtedly becoming more complex,” says Casterman. “Regulators also want faster reporting – it’s no longer the end of the month. Everything must be real time. “When it comes to conducting forensic investigations, every bit of data counts. You want to know everything about the parties involved, about the transaction, its origin – is it from a securities settlement, a trade settlement or just a regular payment?”

These are the questions that clients, he hopes, will come to trust xCOMPLY to answer.

But whether it’s information required under the “single EU rulebook” for anti-money laundering/countering terrorist financing – which is currently being debated – or collecting data to justify investment in a company that may or may not be greenwashing, says Casterman: “Our technology is ready for any change that banks have to go through.”

This article was published in The Fintech Magazine issue 25, pages 6-7