By David Hamilton, Chairman, Solifi
ESG is rapidly becoming a high-value opportunity for secured finance organisations. According to a McKinsey study, “triple outperformers” – organisations that experience higher growth and profit than their peers, while also improving sustainability and ESG, are twice as likely to achieve annual revenue growth upwards of 10 percent.
However, added value is not the only motivation for businesses delving into the world of ESG. Regulations are evolving globally, with reporting now a critical focus. Now more than ever, businesses must be transparent on their ESG performance.
The UK and EU are leading the charge when it comes to regulatory requirements, but other regions are quickly catching up. Countries such as Japan, Singapore, Australia, Canada, and Malaysia have also introduced mandatory ESG disclosures. In the last decade, ESG regulations globally have increased by 155%, making it clear that organisations lacking a solid ESG strategy are at risk of falling behind. Or worse, face financial and legal consequences.
Those who are not following legislation are already starting to pay the consequences. In 2023, Deutsche Bank subsidiary DWS was fined USD$19m by the US Securities and Exchange Commission (SEC) for misleading statements around its ESG investment process.$19m by the US Securities and Exchange Commission (SEC) for misleading statements around its ESG investment process.
While there is still a lot of improvement required in ESG strategy, businesses are already starting to address this. ENGIE Impact reports that 66% of organisations are committed to public carbon reduction in some way, yet only 20% are currently meeting their goals. However, this number is expected to increase, as over 50% of organisations are making fundamental changes to their business model in order to meet these goals. The primary challenge lies in data; or rather, the lack of powerful data management tools. In response to this, asset finance businesses must look at ways they can build these tools into their current processes. The answer to this is through a digital transformation strategy.
89% of large companies across the globe are in the process of a digital and AI transformation. It is already clear that businesses are seeing the value in implementing technology solutions. Yet, many businesses within the secured finance industry consider their digital transformation separately from AI, with different sets of resources for each. However, the lack of integration between the two strategies can lead to neither being as successful as planned.
This article will explore the importance of considering ESG and its data management when building out a digital transformation strategy to maximise success in both areas.
Navigating the hurdles in ESG data management
Accurately capturing and leveraging data is significantly more challenging when done manually. Spreadsheets and manual data keeping, which many lenders are still relying on, leave businesses vulnerable. A survey by KPMG found that almost 50% of organisations use spreadsheets to manage ESG data, while another survey by IMB found that almost three quarters of executives struggle to manage the high levels of manual data. As regulations around ESG reporting and data management tighten, this issue is becoming a major concern for many lenders.
Although most companies have moved to computers for their day-to-day operations, that does not mean they are receiving the full benefit of digitalisation. Just because a process is done on a computer, does not mean that it is much quicker or completed more efficiently.
Poor data management is a major barrier for businesses trying to achieve their ESG targets. Many businesses are not currently doing enough to align and integrate data within their existing workflows. A digital transformation strategy that considers the data capabilities needed to execute ESG tactics is key. 41% of executives believe that inadequate data is the biggest obstacle to ESG success, according to IBM, resulting in reporting being one of the biggest challenges businesses face in their ESG strategy.
Another significant issue for secured finance lenders is a lack of standardisation in ESG metrics, leaving many businesses to operate based on metrics they have developed themselves. In North America, ESG reporting practices vary widely, with the lack of agreement much more prevalent here than in Europe and Asia. In this region especially, a digital transformation can help prepare businesses for any changes on the horizon, especially if these vary state by state. This results in a lack of transparency across the board and a higher risk of non-compliance. Although this is slowly starting to change as regulations set more clear expectations, now is the time for businesses to set a solid strategy and build the necessary foundations to succeed.
Gaining stakeholder buy-in is also a considerable issue for many lenders, especially those in countries without stringent ESG regulations. Aligning the interests of investors and customers can be challenging, and requesting a budget and resources for both digital transformation and ESG separately is much more likely to be met with resistance. However, integrating both into a unified strategy can be more compelling for stakeholders, and can often result in significant cost efficiencies.
The cost of compliance is on the rise, making it a key consideration for lenders when developing a digital transformation strategy involving ESG. Firstly, the cost of non-compliance is high; companies that are not compliant with the CRSD may be fined up to EUR 10 million, or 5% of their annual revenue. Beyond the penalties, the costs of managing an ESG strategy can also be high if not done efficiently. Multiple software systems and disparate resources can carry a hefty price tag. That is why it is crucial for lenders to factor in ESG into their digital transformation strategy, using technology that integrates ESG with current processes in order to keep costs low.
Creating synergy between ESG and technology
By 2027, global digital transformation spending is expected to reach USD$3.9 trillion, up from USD$1.85 trillion in 2022. Businesses are clearly interested in making technology more central in their processes. However, many companies fail to integrate ESG into their digital transformation efforts, viewing them as separate initiatives. Instead, lenders must take a holistic approach to ensure both strategies achieve their full potential.
Often, organisations do not fully consider the impact of a digital transformation strategy, as it is mistaken for mere technology upgrade, overlooking its impact broadly across business processes. As a result, critical areas such as ESG are not considered when creating a digital strategy. It is essential that a digital transformation touches every corner of a business, changing how it operates from its core.
Digital transformation offers a way to increase revenues, improve operational efficiency, quickly react to changes in the market, and better manage data. Data management, in particular, is the area which benefits most significantly from digital transformation from an ESG perspective. From collection to centralization, insights and reporting, being able to effectively manage data is crucial to succeed. So, how can a digital transformation strategy support ESG data management?
Just as with standard customer data that lenders manage, some ESG data is highly sensitive, meaning that not only do lenders need to be aware of ESG regulations, but also data privacy. Given the lack of standardisation and a wide range of frameworks to work from when it comes to ESG, lenders must be more vigilant in the way they handle data. Data privacy regulations still apply, and an organisation-wide digital transformation can tie together ESG data privacy with the rest of the data across the company.
Reducing data touchpoints is an effective way to ensure data privacy. When data is handled manually, there is much less security, meaning it can be easily edited or spread. For example, a spreadsheet can easily be copied, printed, exported, and manipulated. With technology, this data can be stored securely in one place, making it harder to manipulate or duplicate, but easier to completely remove if requested by a customer.
Digital transformation strategies should extend beyond simply implementing a new technology solution. It needs to add value to businesses and support their key objectives. Lenders must rethink what technology can do for them and base their digital transformation strategy around clear, well-thought-out objectives. ESG should be an integral part of operations and thus it is natural that these two strategies link.
Furthermore, digital transformation should not be seen as a way just to make current processes better. Lenders must research what technologies can do, and how new processes can also benefit your business. From an ESG perspective, lenders may not realise the full potential that technology has to support their long-term strategy.
In 2021, the EU proposed The Digital Decade initiative, which provides a framework for a successful digital transformation within the Union by 2030. Embodied within the targets are the circular economy and enhancing sustainability. One target that has been set is 75% of European businesses utilising AI by 2030. If continuing at the current pace, only 17% will be using it. The reason for this is the lack of available training: 94% of people say they are ready to learn the skills they need to work with gen AI, but only 5% of organizations are reskilling their workforce at scale.
Automation is critical when developing your digital transformation strategy. Utilising solutions that automate manual tasks could reduce the time and resources , while minimising errors and risky decisions.
However, automation is not the only technology that can support your digital strategy, and there are other emerging technologies that can be used to manage ESG data.
Unlocking the potential of emerging technologies
New technologies are transforming the secured finance space and can play a crucial role in enhancing ESG strategies. 40% of organisations plan to increase investment into ESG-specific software over the next three years, according to KPMG.
Lenders can leverage their data much more efficiently with artificial intelligence (AI) and machine learning, which can analyse huge volumes of data to help make more informed decisions. AI can be an efficient way to detect patterns or anomalies within ESG data, which may have been missed if this was done manually and significantly reduces the chance of errors. Reporting becomes much easier with AI, digesting the data on behalf of the lender and supporting compliance.
AI is one of the most prominent emerging technologies in the ESG space. Data is crucial to achieving ESG goals, and being able to extract that data quickly and easily will place lenders at a competitive advantage. Additionally, it can be used to analyse competitors’ ESG performance, while identifying competitor performance gaps and market trends.
Transitioning from on-premise systems to cloud-hosted solutions can also benefit asset finance lenders, providing them with the flexibility they need to react to the ever-changing landscape of ESG. Agility should be at the core of a digital transformation strategy, benefitting both current processes alongside future ESG strategy. Cloud-hosted solutions allow for a one-platform approach, having all the functionality a secured finance business needs in one place. This means that any ESG tasks can be integrated directly into the existing leasing workflow.
Another key area where digital transformation and ESG intersect is supply chain visibility. Blockchain can be a great way to monitor the supply chain, providing a record of every transaction. This opens an opportunity to create a more sustainable, ESG-friendly chain. Data held on blockchain is secure and tamper-proof, and is a reliable source for ESG reporting.
Why the time for digital transformation is now
Within the next 80 years, up to USD$14.2 trillion of infrastructure assets globally are at risk of extreme flooding, according to a report by the IPCC. For secured finance lenders, this underscores that transformation is not just an opportunity – it is a necessity.
An effective ESG programme goes beyond regulatory compliance; it safeguards businesses against the risks that come with environmental, social and governance changes while at the same time opening new opportunities. The asset finance industry specifically has a vital role to play in global sustainability goals.
Expanding into new areas and taking advantage of new opportunities, such as green financing, are made much easier when incorporated into a digital transformation strategy. Flexibility is key in asset financing, and as consumer habits change, lenders must follow. In order for the industry to fully embrace ESG, there needs to be a mind shift from it being a tick-box exercise, to seeing it as an opportunity.
Although a comprehensive ESG strategy can come at a cost, as there are additional resources needed, investing in these areas is essential for long-term success. If lenders build their digital transformation strategy with ESG in mind, this can cut down on the costs, as resources are consolidated. Lower costs also make it much easier to get stakeholder buy-in. This is further supported by report by McKinsey, which found that 57% of surveyed executives and investment professionals believe that ESG programs create shareholder value. Between the lower costs through digital transformation, and the added value of ESG, engaging with stakeholders should be much easier.
Effective management of ESG data is vital in a successful strategy. Ensuring proper management of vast amounts of ESG data can be a challenge, which is why a digital transformation strategy is key. Lenders must ensure streamlined data collection, tracking, reporting, and security to position themselves for better performance, which is much easier with the right technology. As asset finance lenders play a crucial role in global sustainability, leveraging technology for data analysis can enhance decision-making and help identify ESG opportunities that better align with their goals.
It is vital that lenders define what digital transformation means to their business, and how it can be used in their ESG strategy. Digital transformation can mean anything from going paperless to utilising complex software, so lenders need to have a clear vison on what they want to achieve. Technology should be evaluated from a business perspective, rather than trying to fit technology solutions into current processes. Too much customisation and implementing multiple solutions can make operations too complicated, even though it seems logical to have a “perfectly tailored” solution.
Asset finance lenders have a significant role to play in supporting businesses in their own sustainability goals. By aligning digital transformation with ESG goals and data management, lenders not only ensure compliance, but also position themselves to capitalise on emerging opportunities, ultimately driving growth, profitability, and most importantly, change within the industry.
This article is an excerpt from the 2025 edition of the World Leasing Yearbook