FS in Focus

Roy Jubraj: Hi everyone, and welcome to the latest edition of FS in Focus. I'm Roy Jubraj and I lead Baringa’s digital and AI capability within our financial services business.

Today we're exploring a topic that's rapidly evolving, the intersection of artificial intelligence and sustainability. AI is already transforming how firms manage ESG disclosure, assess climate risk, and unlock new investment opportunities. But it also comes with its own environmental and ethical footprint.

So the question we're asking today, is how do we harness the power of AI to drive sustainability, while ensuring AI itself is governed and deployed sustainably?

To unpack this, I'm joined by Emily Farrimond and Dawid Reckert, who work in our climate and sustainability team and have been leading our work on sustainable AI in financial services.

Welcome both. Dawid, let's start with the opportunity side. How can I help financial institutions accelerate their sustainability goals?

Dawid Reckert: So if we look at our clients, they are already deploying AI, to deliver on their sustainability goals. Over the last 6 to 9 months, we have seen them deploying pilots to use large language models to monitor green investments, to look at ESG risks and to automate report drafting.

This all requires a lot of unstructured data, such as annual reports, investment insights, but also the connection to news feeds and social media feeds. By doing that, they can unlock insights that they were not able to gather before.

So a lot of the focus right now is on climate transition risks and opportunities but we think this can go further and deliver more value. So if we are looking for example, on human rights risk assessment and this global supply chain, this requires a lot of deep research and understanding of the suppliers, the geographical footprinting of their own locations, but also the knock-on effects within the supply chain. As we can see, this delivers already today real value and understanding on the risks and opportunities. But that's only half of the story.

Roy Jubraj: That's great. So lots of data, the ability to actually get some efficiencies. But there's a lot of value in terms of speed as well. That's great.

Emily, why is it important to consider the sustainability of AI and how can financial services action this?

Emily Farrimond: So I think we appreciate that there's a lot of value to be realised through the deployment of AI. But also there are a number of risks.

So from an environmental perspective, a ChatGPT query uses five times more energy than a regular Google search. We know that training an large language model (LLM) model emits the equivalent CO2 to 125 return flights from New York to Beijing.

We also know that a simple 100 word query or response uses 500ml of water and you might say 500ml of water that doesn't feel like a lot. Well, by 2027, our modelling is predicting that we'll be using as much water to cool data centres as two thirds of the UK's water usage per year.

So that's huge implications. Now, what we also know is that we are seeing challenges around decisions made about water provision in water stressed areas for data centres versus crop watering versus local community water requirements and we've seen examples of that in both Spain and the United States.

We then think about the social implications of AI, and we are led to believe that 25% of the workforce could be at risk of losing their jobs due to AI deployment. That's about 300 million people. Concerns have been raised, as you'll know as well about the use of LLM models and how they're trained and whether actually there's inherent bias associated with those.

And then if we think about governance of AI, loads of our clients have very quickly deployed AI within their organisations thinking about value and opportunity, which is fantastic. However, what we're seeing is, the vast majority of the workforce are using external tools like ChatGPT at least once a week, but actually two thirds of them are essentially not verifying with their organisations about the data that they're sharing with those models.

So in the UK for example, we know 20% of companies have experienced data leaks due to employee use of AI. So whilst we see a lot of opportunities, there are a lot of risks to think about.

Roy Jubraj: Amazing. I mean the impact is vast, isn't it? Dawid, how should organisations embed sustainable AI strategy into their organisation?

Dawid Reckert: So how we see it comes basically down to four pillars that are underpinned by the foundations of data technology and infrastructure.

The first pillar, strategic alignment and guardrails. So making sure basically that your investment in AI is aligned with your net zero and ESG commitments.

The second pillar being use cases and implementation so picking the right things to do and making sure that you drive return on investments on your pilots.

So, third pillar being risk and controls. So making sure that the output is unbiased well-governed and, reliable.

And then the fourth pillar being people and culture. Making sure your people are trained, the teams are trained. Making sure that you foster collaboration between different teams like sustainability and data scientists. And then also, engaging and creating AI literacy in the whole organisation.

By getting these four pillars right, you are basically already implementing everything that you need to be successful on your AI journey.

Roy Jubraj: That's great. So actually very simple four key pillars. Thank you. Emily, what practical steps should financial services leaders take to get started on AI in Sustainability?

Emily Farrimond: So firstly I did want to say that we do see massive value for our clients in financial services. So by 2030 forecasts are that $1 trillion of investment per year will be required into the data centre market, so huge opportunities for our clients there in financing that.

However, for our clients, banks, pension, insurance funds, private equity, they need to be quite thoughtful about the risk that they're exposed to. So, before thinking about that financing opportunity, have they done their ESG due diligence necessary to make sure that they understand at the individual asset level but also the portfolio level, the risk that they might be exposed to?

As Dawid said that we think there are four key pillars and areas that need to be considered in the implementation of AI. And really the challenge that we're seeing at the moment is the necessary focus on the alignment with AI and the overall business strategy, making sure that actually the risks associated with AI deployment are appropriately managed, that the governance is in place when something does and inevitably will go wrong, and that the teams are appropriately trained and skilled to operate it effectively, and with minimal risk.

Roy Jubraj: Whilst practical, it's a decent amount of things that needs to be considered for our leaders, in our organisations, in financial services. So thank you very much.

If there's one key takeaway, it's that AI can be a powerful enabler of sustainability, but only if it's used responsibly. Financial institutions have a unique opportunity to lead on both fronts, using AI to accelerate sustainability goals and setting the standard for responsible AI deployment.

Thanks for joining us on FS in Focus and we'll see you next time.

Guy Munton: Hi everyone and welcome to the latest edition of FS in Focus. I'm Guy Munton, a Partner in our Finance, Risk and Compliance practice, and we're going to spend the next five minutes unpacking Targeted Support and what it means for the UK financial services sector.

You may have heard the Chancellor, Rachel Reeves, reference Targeted Support in her much-discussed Mansion House speech last week. And that's because it's directly aligned with the Government's stated objective of regulating for growth.

I'm delighted to be joined by Ellie Simmons from our Wealth and Asset Management team and Jo Cordner from our Risk and Compliance business to talk through the key aspects of targeted support and why it's such an important and exciting development for the financial services sector. Welcome both.

So Ellie, let's start with the basics. Tell us all about Targeted Support and why it's being introduced now.

Ellie Simmons: Sure. So, the Targeted Support framework is one of the outcomes of the FCA's advice guidance boundary review, originally launched in 2022. Targeted Support focuses specifically on pensions and retail investment activity.

So, it allows providers to suggest a particular product or course of action that could drive better outcomes for groups of customers with common characteristics ie, “customers like you could benefit from taking the following next step”. This is a big change in the industry. So, what we see with firms today is that they're nervous on engaging beyond highly generic guidance out of fear of overstepping into that kind of financial advice space.

So, the industry has been overwhelmingly positive about targeted support, because really they do want to help their customers have better financial decisions. So why is that kind of engagement and the support that comes with it so relevant right now? UK customers have not had access to good quality support when making financial decisions for a long time.

The FCA’s most recent Financial Life survey shows only 10% of UK adults have received financial advice within the last 12 months. With the UK government now aggressively promoting increased retail investment in the UK economy, it's more important than ever that customers have access to meaningful information on how to invest their money well.

We also have the context of an increase in the volume of scams and investment fraud facing UK customers. It's important that people have providers that they can trust and rely on to have frank discussions with them about their financial decisions and these trends are not just in the UK.

We see that this is a global theme. Europe, Canada, Australia and New Zealand have all been carrying out reviews seeking to improve access to financial advice over recent years.

Guy Munton: So, Jo this all sounds really positive. It's rare to have some new regulation that is so broadly welcomed by the industry. Surely there must be some complexities or challenges within here?

Jo Cordner: Of course. Yes, there are challenges. The intent behind Targeted Support is to create value both for providers and consumers. But there are three key challenges worth highlighting because all good things come in threes.

So firstly, the direct marketing challenge, particularly where firms will seek to deliver targeted support by proactively engaging customers.

There's a real question around how that will work in the context of direct marketing rules, where customers have opted out of direct marketing services.

Next, vulnerable customers. To deliver Targeted Support, firms have to identify cohorts of customers based on common characteristics and also exclude customers who might not receive better outcomes from the targeted support. So, we know that there are inherent challenges across the industry, not only for identifying vulnerable customers, but also in assessing how to meet the needs of those customers.

So, there's a clear risk that vulnerable customers will be excluded from the better outcomes that Targeted Support aims to deliver.

And then finally, outcomes monitoring. So, a critical part of being able to meet the better outcomes threshold will be the effective monitoring of outcomes for customer cohorts. From the extensive work that we've done with firms embedding the Consumer Duty we know a lot of firms are still battling to get their outcomes MI into shape.

So, there's a very real possibility that some firms just won't have the quality of data that's required to prove to the regulator that they can deliver the required standard under Targeted Support.

So, to close out. What should firms be doing now to prepare for the implementation of Targeted Support?

So, for those firms who are looking to build Targeted Support services, they need to decide first whether they want to be early adopters of these services. So, there's some clear benefits of moving early. So being first to your customers to build that confidence in and loyalty to your brand and services.

But if early adoption is going to be your strategy, you really do need to move quickly. You need to be able to have a solution designed, built and tested before the authorisations window opens in spring next year.

But regardless of those timelines, all firms need to define their strategic position. So, firms need to be clear about whether this is really about improving outcomes for the broadest number of customers possible. So are we looking to deliver improvements to a sufficient level but across the board to improve that customer trust, understanding and loyalty, ultimately supporting retention rates.

Or are you aiming to go further and look at product and portfolio optimisation? So really narrowing down those cohorts to optimise outcomes for different cohorts and releasing higher revenues and margins in the process. For lots of firms, it's going to be somewhere between the two of those options, but it's important to have that strategy clear from the off.

So now the focus needs to be on building that business case. You want to be mobilising cross-functional teams to help really understand the quickest route to value.

And we believe that you need to be thinking about an agile approach to bring these services to market. So, prioritising which situations you're going to run with first and then implement a continuous test-and-learn approach to make sure that you're able to evidence that your approach is working and you're delivering those better outcomes.

Starting now will help you to build a robust submission for the authorisations process in March.

Guy Munton: Thanks Jo. I completely agree, there's a real need to move quickly, and there's a lot to get done in a short time for those looking to be first to market.

For me, the big takeaway is that this will deliver real benefits for customers and for firms. But there are some key challenges to work through before March next year. Having a clear strategy and making good progress over the next six months is crucial.

That's all we have time for today. Thanks for watching and we'll see you next time on FS in Focus.

Bruce Laing: Hi everyone, and welcome to the latest edition of FS in Focus. My name is Bruce Laing, and I lead Baringa’s climate and sustainability team for financial services.

Today we're going to talk about a challenge all financial services leaders will be facing. How can they steer their firms and clients through what is becoming an increasingly turbulent shift to a lower carbon economy?

With 1.5 degrees of warming now out of reach, according to the United Nations and the Net-Zero Banking Alliance formally dropping the requirement for banks to set targets aligned to 1.5 degrees, how should firms think about setting strategy and doing transition planning to maximise commercial opportunities and prepare for the risks ahead?

To discuss these topics, I'm joined by Evan Hirsch and Emily Farrimond, two experts in our sustainability team who work with global banks, insurers and asset managers. Evan, Emily, welcome.

Starting with you Emily, how has the recent market volatility and policy uncertainty impacted the transition and the clients that you work with?

Emily Farrimond: So, for our clients, there's been a growing realisation that actually their 1.5 degree aligned targets and where the real world is currently tracking to are not aligned.

So, our base case tells us that actually we're on track for 2.5 degrees of global warming. We've also seen a strong narrative out of the US from executive orders around diversity, equity and inclusion, pausing of the Inflation Reduction Act (IRA) and also challenges around tariffs, affecting renewable supply chains. And then within Europe, it does feel like we've seen a little bit of a step back with the revisions around Corporate Sustainability Reporting Directive (CSRD) and the Omnibus.

So, from a client perspective, a lot of change and quite a lot of things to worry about. So firstly, we're seeing them be really thoughtful about what information they might put into the public domain, not wanting to fall into any potential traps there. Secondly then we're seeing a real revisit of policies. So, where policies have been set around things like oil and gas, exploring whether they're now valid in the new world that we're facing into. We're then seeing obviously I talked about the real economy decarbonisation and these are our clients’ 1.5 degree aligned targets, the realisation that those may not be achievable.

So a lot of thinking about whether those targets need to be revisited and actually whether climate and sustainability strategies need to be amended and updated.

Bruce Laing: Evan, Emily’s just talked about the fact that a 1.5 degree world is slipping away. What does this mean for financial institutions strategies and targets?

Evan Hirsch: A lot of financial institutions have set 1.5 degree targets and some of those might now become much more challenging to achieve in a world that's looking more like it will be 2 degrees.

But what that also brings are two real important considerations for them to bring into their business. The first is understanding what does that transition look like.

So that means running various scenarios to see what

that could mean for their existing business strategies but also what that might mean for their liabilities and their investments.

The second piece is much more exciting. That's how can they support their clients through this global transition. As their clients need to change their business models, the products that they're selling, insurers, asset managers, banks are in a really exciting position to help them go through these really turbulent times and can build better relationships and help those clients succeed.

Bruce Laing: That's a really interesting point, Emily, are there any other considerations?

Emily Farrimond: Well, I think what we're starting to see is greater understanding of the interrelationship between climate change, temperature rise and nature and biodiversity impacts.

So that's a key priority moving forward. And then clearly, the hotter it gets, the greater the implications on people. So really starting to understand just transition implications becomes critical too.

So what do banks, insurers and asset managers need to do to maximise the opportunity and manage the risks ahead?

So firstly, I think it’s making sure they understand the risks and opportunities and the first step in doing that really is to make sure they understand all of the climate scenarios and the likely views about how transition will unfold.

So that's from 1.5 degrees and making sure that you continue to at least measure and monitor against that through to an internal base case. So, what's your in-house view about how transition is actually unfolding today to other more extreme scenarios such as overshoot scenarios and what they might look like.

Now, all of that leads you to an understanding of, okay, what are the risks and also the opportunities under each of those scenarios and how can you maximise those?

Now, clearly, you'll have some products in place that may enable you to maximise those opportunities, but actually the risk appetite might not be there.

So, there's quite a lot of work to do to really start to understand some of those potential new technologies. In particular, there's some really extreme technologies in some of those overshoot scenarios.

And then I think for a number of firms their role might change slightly. So we talked and Evan talked earlier about sort of decarbonising portfolios, but that doesn't decarbonise the real economy. So you might want to invest heavily in climate tech and that might be your role. Equally, you might decide to engage heavily with the high emitters and really support and encourage them to decarbonise their businesses.

Bruce Laing: Evan a lot of the work you do is with asset managers and insurers. How do these challenges differ from those facing banks?

Evan Hirsch: Yeah, it's a really interesting question because asset managers and insurers have a completely different model and very different impacts from climate change. We think about insurers starting out as risk managers, climate change clearly has massive impacts for them as they're thinking about their underwriting.

We take the recent wildfires in California. The reason those were so severe is because not only were there wildfires, but the wind was going at the speed of four football pitches a minute.

Clearly, that's really putting a lot of pressure on historical underwriting models that just aren't equipped to deal with climate change, which has never happened before. All of those models are based on things that have happened in one in 50 years, one in 200 years. And that modelling just doesn't work for them as insurers.

So, they need to evolve the way they're thinking about modelling risk. And on the other side, as asset owners, they need to be working with their asset managers to think about how do their assets that they hold that match their liabilities need to change in the future, how do they make sure that they're protecting their clients and their shareholders by investing in a world that will look very different and needs to have liabilities that match those new risks that they're facing in the future. That requires a lot of coordination between them and the asset managers who need to understand what that future world looks like.

Bruce Laing: A final question for you both. What should financial services leaders do to navigate this transition?

I think the key thing is hold the course. So, whilst we've made a huge amount of progress, we’re some way away from where we need to be. Now, what can they do to influence that?

I actually think the key thing is collaboration within their industries and then collaboration with their clients.

Bruce Laing: Evan?

Evan Hirsch: I think as leaders across the business, they need to be involved in the process. A transition plan can’t be something that's developed by a group sustainability team.

It needs to be something that all leaders across the business are accountable for and have been involved in creating.

Bruce Laing: Thanks both for those really useful insights. This has been a really timely conversation.

If there's one thing to take away, it’s that while the path to 1.5 degrees may be narrowing, the role of financial services institutions is becoming more important. Not just in managing risk, but in providing their clients with the products and services that they need to transition. This means embedding credible business-wide transition plans, having the knowledge to support clients through uncertain times and actively managing your portfolio because the direction of travel isn't going to be linear.

Success requires a clear strategy, strong leadership and alignment across all parts of the business.

Thank you for joining us on FS in Focus and we'll see you next time.

Guy Munton: Hi everyone and welcome to the latest edition of FS in Focus. My name is Guy Munton and I lead Baringa’s Finance, Risk and Compliance practice. Today we're talking about operational resilience, which is a key regulatory priority and a focus area for firms around the globe.

In an environment filled with uncertainty, our clients often ask what being resilient means in practice and what they need to focus on in order to remain fit for the future. To help shed some light on this, I'm delighted to be joined by Salina Ladha, Partner in our Finance, Risk and Compliance practice.

Welcome, Salina. Great to have you with us.

Salina Ladha: Thank you for having me.

Guy Munton: Resilience feels like a topic that's been on the agenda for some time now but seems to be gathering momentum. Why is this?

Salina Ladha: I think that's right. We've definitely seen a step up in regulatory scrutiny, and that's through the introduction of new resilience requirements, an increase in focus and supervisory reviews, and also a whole bunch of information gathering exercises by the regulators.

There's been a particular focus on cyber and third-party resilience, and that's to be expected both given the increased reliance on third-party providers, the increased prevalence of cyber attacks and the exposure of firms to those cyber attacks through their supply chains.

If you pair that with an ongoing period of global uncertainty and instability, preparing for the unknown has never been more important. And that is at the heart of operational resilience. Making sure that you are prepared for the unexpected, that you can keep providing your important business services through a period of disruption.

Guy Munton: It's clear that being prepared for the unexpected has been a theme that's been driving regulatory change for some time now, but what more can we expect to see?

Honestly, lots. So, in the UK we have the critical third-party (CTP) regime that came into effect at the start of the year, and we're waiting to see which firms get designated as CTPs and what that regime means in practice.

You also have the incident and third-party reporting consultation, which closes mid-March, and a further consultation that we expect to see later in the year on ICT management.

In Europe, DORA came into force on the 17 January, but there's still a lot that firms need to do to fully implement the requirements, particularly around penetration testing.

In Australia, we have similar requirements that firms need to comply with by July this year or next year if you're a non-significant financial institution.

The US is a really interesting case. We saw the Office of the Comptroller of the Currency (OCC) talking about changing operational resilience requirements last year, but against the political backdrop, we don't really know what to expect. But what we have seen is a step up in supervisory focus by the regulators. And really that's probably just the tip of the iceberg.

Guy Munton: So, it sounds like there's a great deal going on internationally. For our clients and firms that operate in multiple jurisdictions, what do these changes really mean for them?

Salina Ladha: I think there's some real challenges that firms need to navigate. They're having to evolve their operational resilience operating models to take account of ever-changing regulatory requirements. And that's a lot to be dealing with.

For global firms, although there's been a high degree of international coordination on this topic and as a result, a high degree of consistency in the requirements there are still regional nuances that firms need to be taking into account different terminology, different expectations and different accountabilities and responsibilities.

And they need to take all of these things into account as they are determining what their global operational resilience operating models are really going to look like. But I think there's also opportunity here.

In the UK and in the European Union, the requirements around critical third parties are going to increase the information flow and the level of engagement with those critical third parties. For the firms that are using those suppliers, that presents an opportunity to improve the way that those relationships are managed.

Guy Munton: So against the backdrop of all those international changes, what is it that our clients really need to be focused on?

Salina Ladha: Over the last few years, firms have been focusing on implementing the operational resilience requirements in their jurisdictions and remediating vulnerabilities. But there's more to do. Firms need to enhance their recovery capabilities when it comes to severe scenarios, such as a severe cyber attack or failure of a critical third party. And that means looking at strategies such as data vaulting, data rebuild capabilities, and also enhancing contingency and exit plans for third parties.

Recent operational incidents have shown that firms have more to do when it comes to understanding their supply chain dependencies, improving their communication strategies, and then thinking about peak periods when it comes to scenario analysis.

As we look ahead, though, firms need to think about embedding operational resilience within their operating models, bringing together business continuity and IT continuity so they can really driving greater value and insights. And that's been a real focus area for regulators. And then also thinking how you can leverage your other risk and control frameworks.

So your operational risk, third-party risk, change management frameworks to be proactive in the way that you're thinking about resilience going forward.

Guy Munton: So there's clearly a lot to think about. What advice would you give to business leaders in the financial services industry today?

Salina Ladha: I think firstly, join the dots in your organisation. At the end of the day, everything comes back to resilience. Implementing new technology, making changes to your workforce. Introducing new products, moving into new geographies.

All of those are changes that will have an impact on your resilience profile. Crystallisation of supply chain risk, climate risk, geopolitical risk. All of those will have an impact on your organisation, on your workforce, on your infrastructure. So it's really important to be thinking about resilience in your day-to-day decision making, I think secondly, consider how you might be able to use AI to improve the way you manage your resilience within your organisation.

Be that to help you more quickly identify potential disruptions, respond more quickly to those disruptions. To identify potential scenarios that you want to be planning for in the future. But you also need to think about what are the risks that use of AI might bring.

And so considering where is the data being held that those AI systems have access to, where there are automated responses, making sure there's a failsafe in the event that those don't work.

Thirdly, communication. I mentioned this earlier. We've seen examples recently where firms can spend too long in putting out communications in the event of an incident, because they're so focused on making sure they have all of the information, but as a result, that can have an impact on consumer confidence and ultimately a firm's reputation.

The example I always go back to is Norsk Hydro. They suffered a cyber incident in 2019, and the way they managed that incident, and particularly the proactivity of their communications, for many was the driver as to why their share price rebounded and in fact rose as they started to recover their capability post that incident. Finally, I think the last piece of advice that I would give to firms is to really think about their place in the ecosystem and the intersection between their resilience and the resilience of the system as a whole.

And that has been a real focus for regulators. They want firms to understand what is the impact of disruption to a firm individually for the market. And that means bringing together operational resilience and financial resilience modelling.

Guy Munton: Thanks, Salina. Some great food for thought there. My key takeaway is that looking ahead, firms need to focus on how they integrate and embed their resilience capabilities within the DNA of their organisation. As firms growth strategies change and the use of technology and AI evolves, their strategies for ensuring resilient services need to evolve in parallel to keep pace.

I hope you've enjoyed today's edition. Thank you for watching and stay tuned for our next FS in Focus.