Data is what powers everything, and without data, there is no foundation from which technology can flourish. With ESG, Whelan outlines that the scarcity of data is a real issue when trying to measure and track progress. While each letter of ESG separately can be tracked, lumping them into one entity is more complex. Whelan states that regulations have "double materiality" – a financial impact and a real-world impact - adding that "to report objectively, rather than subjectively, on double materiality is difficult."

A significant reason why financial services companies have been taking a step back when it comes to sustainable initiatives and diversity is the political shift in the US against ESG and the removal of DEI policies in corporations. Despite these sentiments, Whelan states that there are pockets of investors and businesses who want to invest in ESG, just more discreetly.

Whelan does not think it is unique for firms to still be focused on ESG investment, but the language around ESG stewardship is changing and the promises for the future are becoming less frequent.

"We do still see institutional allocators as financial banks very focused. It’s not regulatory driven, it’s commercially driven. People do want to invest and engage with stakeholders with a sense of purpose and values."

Institutional allocators, Whelan insists, are not looking at ESG from the political perspective that is splashed across the news and social media, but considering the impact of climate change, the success of a product, its impact on workers and society, and how it is governed. He details: "I think it’s been overly politicised, the term ESG, and it’s been misused, and it’s brought this reputational risk that’s just extra."

However, there is progress being made: "You are starting to see more data to show that if you put it through, that risk management forward-tilted perspective, you can get excess returns. We need to see more of that quantitative data come through - then it becomes less subjective, more objective - less emotional, and more scientific."

The politicisation of DEI initiatives

Whelan is an advocate for DEI, haven spoken about financial inclusion and diversity extensively throughout his career. Drawing parallels between the cultural shift on the approach to both ESG and DEI, he indicates that being an advocate is becoming more of a reputational struggle.

"It’s the same for ESG, it’s kind of the same for AI. You see people talk very purposely and intentionally about what they do and don’t do an AI - anything that’s new and different. We’re in a heavily regulated, heavily scrutinised, reputational trust business - people don’t want to erode that through loose talk."

The words ‘diversity and inclusion’ have been "weaponised," Whelan states: "I think it’s more politically sensitive now. Some of that might be the political environment we’re seeing, definitely, and it’s quite difficult. Then I look at myself, and you need moral courage to speak out. I’m not critical of myself, but I need to continue on my path, because I do believe in it. Not just societally, I believe it’s actually good business."

He adds that the "pace of change is glacially slow. Having said that, I think it is expanding rather than contracting."

Deregulation is slowing down ESG progress

The push and pull of Corporate Sustainability Reporting Directive (CSRD) has not provided clarity on the data scarcity problem. The Corporate Sustainability Due Diligence Directive (CSD3) would have provided a framework for aggregated data, but the regulators have reduce scopes for corporate data reporting.

This deregulation means that there needs to be more voluntary pickup on ESG initiatives, Whelan explained: "We’ll go to those who are transparent and provide the data rather than those who are unwilling. That’s why the big change with sustainable data needs to move into every geography, in essence, and into the private market space where you’re not listed, so you don’t have to report from a regulatory or legal basis, but commercially your investors are requiring this information."

He adds that a "frustration to the entire market" is the current model, in which institutions pay ESG data providers high prices for their datasets, which cannot be compared to each other.

Looking to the future, Whelan says that the industry is becoming more cautious: "the political climate we have won’t regulate up," he explains. Adding that there will be "slow and steady" progress with regulators, so they should instead turn to regulator demands.

ESG will continue to grow and be used as a risk management tool, Whelan predicts. Furthermore, as the transition of wealth moves to the next demographic that is younger, they will be more socially aware and willing to align their money with their values.

Can AI drive ESG forward?

While artificial intelligence (AI) has been championed as an all-encompassing solution for a plethora of complexities the industry is facing, Whelan reiterates that for AI to be able to “move the needle” on ESG investing it needs accurate data.

Whelan highlights that there are a lot of unanswered questions when it comes to AI – trust, governance, ethics, and explainability are still up in the air.

"If you’re going to use AI for your ESG process, you need to ensure that the AI you’re using is responsible, the tool is ESG friendly and comports with your sustainable principles. It’s not a clean line from AI to fix the ESG data or perception problems in the market."

Echoing a familiar catchphrase, "the US innovates, and EU regulates," Whelan points out how there are different approaches to AI innovation and integration, especially in a heavily regulated sector like financial services. Due to the lack of trust associated with AI, it cannot mature without regulation and explainability. He predicts that instituting AI literacy will become just as important as financial literacy.

Whelan reiterates the "slow and steady" progress, stating that there won’t be an AI revolution like the industry is claiming, but an evolution as trust and reliability of the technology matures.