ESG in capital markets: two sides of the same coin

I’ve noticed something over the past few months. Whenever I’m in a virtual room that is full of people from a capital markets firm and I mention ESG (or, environmental, social, and governance) their ears perk up. They sit forward in their chairs and are more engaged. There’s something new and interesting about the way we’re talking about our internal values, organizational environment, social governance, and corporate governance. And that’s sparking people’s interests, as well as their imagination.

At such an event, an attendee asked me a question I had never considered: What ESG products does Microsoft offer to capital markets firms?

Microsoft has no SKUs for an ESG product, so what do we have? To answer that, we need to take a closer look at ESG as a concept. For capital markets firms, it means uniquely examining the two sides of ESG: external factors and internal factors.

External market-facing risk

ESG factors play an important role in analyzing the risk of a potential investment. The inherent challenge is in uncovering relevance in the data and trying to predict risks.

While regulations and taxonomy for ESG data and reporting in the US haven’t emerged, the Sustainability Accounting Standard Board designed a Materiality Map, which can be used to pull out relevant and specific data by industry. The World Economic Forum also released a report on these broad data points, with an underlying goal to guide companies.

For public companies, ESG shows up in the public domain, though it remains filtered. ESG data is largely secured inside a company and surfaces through its various news articles. It can also be released in quarterly or annual corporate reporting. For privately held companies, ESG data is internally locked across unstructured datasets, and are only revealed publicly in the news. In both cases, getting to the materiality, or relevance, of the data is challenging.

To combat this challenge, firms may choose to leverage an experienced external data provider that has performed more heavy lifting on data collection and analysis. The chosen provider may also conduct their own analysis, applying big data and algorithms to distinguish between the noise and the needed data. This additional analysis could potentially help a firm eke out investment performance gains. Overcoming these challenges is more difficult because ESG is a complex data space with many factors to consider.

Microsoft provides a platform to bring these companies’ datasets together with existing market data, as well as the firm’s own IP on the cloud. Once this data is cloud-based, its value can be unlocked through technology repositories. Data lakes and machine learning can bring data together in such a way to surface relevant information.

Internal values-driven initiatives

Besides examining ESG factors across a portfolio, capital markets firms should also examine their own internal ESG initiatives.

A firm needs to internally determine what ESG dimensions and attributes are important. The Materiality Map is a great starting point. Within the map, you will find various dimensions such as human capital, leadership, and governance. Within the map’s human capital dimension, firms can assess the internal importance relative to diversity and inclusion. Within the leadership and governance dimension, firms can determine how to mitigate system risk through internal business ethics. Each component of the map can help define and measure a firm’s value-driven strategies.

Many firms have large buildings, campuses, or real estate investments that could be fitted with sustainability in mind. Last year, Microsoft IT showcased how we created our own smart buildings using Azure Digital Twins and IoT, which can affect everything from energy consumption to water usage. This happens when you bridge the gap between on-premises technology, like an IoT sensor, to the cloud for data processing and analytics.

When it comes to technology itself, there is also an opportunity to impact a firm’s carbon accounting, especially when workloads are moved to the cloud. Microsoft’s Sustainability Calculator aims to help meet your climate goals by surfacing how Azure and Dynamics workloads influence the environment in early access.

However, it’s important to remember that ESG isn’t only about sustainability. Microsoft also offers products that can support employees, like LinkedIn Talent Hub, that can help recruit and onboard diverse candidates. Firms can take this further by supporting employee resource groups, the power of Microsoft 365, and Workplace Analytics to help executives understand how a firm’s productivity is trending. This ultimately helps identify a potential sense of community or employee burnout.

Two ESG views to consider

Both perspectives put capital markets uniquely at the center of ESG. These perspectives leverage capital to influence companies that understand how ESG intersects with their risk and looks internally to change for the better. This approach matches purpose with profit.

There is no panacea for ESG. Every firm will have unique challenges that require a nuanced solution.

This all brings me back to answering the original question. No, there isn’t a SKU to solve your ESG challenge, but Microsoft and its partners are uniquely positioned to layer on ESG risk factors to traditional means, reduce green-washing through data analysis, improve a firm’s own ESG footing, and more. At Microsoft, we do this through our technology solutions, with the vision of empowering as many firms and companies as possible to achieving their ESG goals.