Flexibility in times of uncertain data & moving regulations

The week after Easter Quantfolio was invited to join the Norwegian delegation travelling to Stockholm Fintech Week. The delegation consisted of members of NCE Finance Innovation and it was great to meet up with some of the promising Fintech companies from Norway.

Stockholm Fintech week is a multi-day event covering a wide range of topics under the Fintech umbrella. Quantfolio participated in the panel discussion related to Sustainable Finance. The discussion was moderated by Smiriti Mishra who is an expert on machine learning and sustainability and I was joined by Andre Havas who is the CEO of CIMAlgo. We ended up with some interesting discussions and here are some key takeaways of what we discussed:

• Push towards sustainable finance and sustainable funds is now mainly driven by end investors who want to do something good with their money;
• Regulatory requirements are forcing financial institutions to take a stand;
• There are different approaches on how to invest in sustainable funds and find sustainable funds. Per now a combination of a quantitative and qualitative approach can be a good starting point, as there is lack of data per now;
• Standardisation of definitions and data reported by companies will be evolving over the coming years and make it easier to work with;
• The regulatory framework and sustainable finance is a complicated topic and it is important for advisors to make it understandable for investors, in order to get the effect. Unified standards of definitions and data will be a great contributor to this.

My observation is that financial institutions out there are excited and eager to contribute by implementing the new regulations. This was confirmed by discussions I had after the panel discussion, and is something we observe when talking to our clients. However, the current state of data quality and a moving regulatory framework create some uncertainties. Therefore, many financial institutions are not 100% sure how they should implement this and how their current processes align with the new requirements.

Summary

We believe that starting to implement solutions and making a complicated framework understandable for investors will be important for success, both for the financial institutions and the investors. Getting clear definitions and unified methods for assessing the sustainability preferences will also reduce the chances for confused investors. Getting started is important, but the key is to have the flexibility to continuously develop, as the regulations and data will be in continuous development over the coming years.