Digital Organisational Identities as a Catalyst for Sustainable Finance
From KYC to ESG: Digital organisational identities and verifiable ESG metrics as a foundation for green finance.
Introduction
In our increasingly digitised and sustainability-oriented world, digital organisational identities are gaining importance, especially in the context of the financial industry. These identities allow companies to securely and efficiently share verifiable information about their business practices, including KYC and ESG (environmental, social, governance) metrics, with financial institutions. This is not only a step towards a more transparent and efficient financial world, but also a crucial factor for the implementation of legal regulations, sustainable financial strategies, sustainability-oriented ESG-related risk strategies, new scoring approaches in lending and transformation financing, and authentic green bonds.
This article was prepared in cooperation with Bitkom, Source: Ihren Ausweis bitte: Digitalisierung von Identitäten | Publikation 2023 | Bitkom e. V.
1. Organisational Identities in the Digital Age
In transactions between companies and the financial industry, organisational identities are more than just a company name, a commercial register number, a check of the ownership control structure or clarification of the beneficial owners. They are a mesh of different attributes that uniquely identify an organisation in regulated processes and digital ecosystems and make it assessable in terms of corporate scoring. This includes not only basic information such as company location or industry, but also specific metrics that represent the company’s economic performance, KYC/AML compliance, and sustainability practices.
The importance of digital organisational identities will increase significantly in the coming years. They are important for interactions with customers and suppliers and especially in the financial sector for automating KYC, AML, ESG compliance in onboarding processes. Banks, insurers, and regulators will use these digital identities to provide a verifiable picture of an organisation beyond what the analysis of traditional paper and PDF documents can provide today.
The KYC process is an essential part of the client relationship in the financial industry. It serves both to meet regulatory requirements and to mitigate risk. In the past, this process was mainly based on physical documents, information from data brokers, and manual reconciliations with the corporate and transparency registers of registrars such as the Bundesanzeiger in Germany. However, digitalisation has opened up new opportunities to increase the speed and accuracy of this process. The company and transparency registers of the Bundesanzeiger Verlag, for example, are already fully digitalised today. However, there is a media discontinuity between these fully digitalised registers and the processes of a bank, so that today a lot of data is processed manually in the bank by KYC analysts in painstaking work. This media break is now to be resolved with the help of organisational identities and verifiable verification certificates.
Digital organisational identities for companies can thus significantly simplify and accelerate the KYC process. By using verifiable digital verification certificates issued by the register-keeping primary source, the Bundesanzeiger Verlag, banks can quickly and accurately verify the KYC requirements for their customers. This not only reduces time and costs in onboarding but also for occasion-related and periodic reviews of a bank’s KYC data inventory according to GWG §10.3a, e.g. the data update for existing business relationships.
In addition, digital organisational identities will enable the integration of further relevant metrics into KYC and scoring processes in the future, including ESG-related data issued by trusted auditors, authorities, or tax advisors.
2. EUDI Wallet for Organisations: A paradigm shift
The eIDAS 2.0 Regulation plays a major role in the spread of digital organisational identities. It creates a harmonised legal framework for electronic identification and trust services within the European Union. This is particularly relevant for the European Digital Identity Wallet (EUDI Wallet). In the current (German) consultation processes on the EUDI Wallet, many stakeholders recognise that the EUDI Wallet should provide a solution not only for natural persons but also for legal entities. However, the conceptual and standardisation work on the EUDI Wallet for legal entities is still in its infancy, which is why it is strongly recommended to establish a transitional solution for organisational identities for the next 4–5 years, which will develop step by step towards an EUDI Wallet for organisational identities.
The EUDI Wallet represents a digital platform that, in line with the EU Data Strategy, offers the respective actors sovereignty over their own data without having to share this data per se with a central identity platform operator. Thus, the EUDI wallet for organisations and the concept of data sovereignty will contribute to a significant improvement in confidentiality in business transactions.
Organisational identity wallets go beyond simply storing basic corporate identity information. They enable the integration of evidence and metrics, including financial metrics, trade compliance, operational data, TUV certificates and ESG-related metrics. The information and certificates stored in the wallet can be verified in real time by a business partner, bank or government agency. The EUDI Wallet is thus a catalyst for more efficient and secure business processes in the financial sector.
3. Sustainable Finance Use Case
EU regulations such as
- the Regulation on Sustainability Disclosure Requirements in the Financial Services Sector (SFDR),
- the Regulation on the Establishment of a Framework to Facilitate Sustainable Investment (EU Taxonomy) or
- the non-financial reporting requirements (NFRD)
increase the requirements for transparent and verifiable ESG metrics in the financial world. These regulations influence lending as banks now have to integrate ESG metrics into their risk assessments. Companies with good, verifiable ESG metrics may get better credit terms, while companies that are neither digital nor sustainable, according to the guidelines of a bank’s risk strategy, will get significantly worse credit offers.
These regulations require companies to provide transparent and verifiable data. Wallet-based digital organisational identities offer an excellent solution here. They enable fast and secure verification of the ESG metrics that a company submits to the bank so that the bank can machine-check the authenticity and validity of the ESG metrics statements. When applying for credit, banks can automatically verify the data obtained in this way and incorporate it into a comprehensive credit score. Without these digital tools, banks’ back offices will be hopelessly overwhelmed by the enormous amount of data, the manual verification effort, and the complexity of the verification processes in the new world of ESG metrics and regulatory requirements.
Automating the credit assessment process through verifiable certificates of verification not only offers efficiency benefits through a reduced manual verification effort but also contributes to the prevention of fraud and greenwashing. By directly linking ESG metrics from trusted sources to a company’s credit rating, manipulation, and misrepresentation are made much more difficult. This strengthens the integrity of the entire sector, which is increasingly focused on sustainable financial products. The goal is a credit rating system that goes beyond financial key figures to include machine-processable and verifiable sustainability data. The challenges lie in standardising these metrics in line with risk management and legal requirements. A uniform approach has been lacking up to now both in the selection of data for ESG scoring and in the technical description of the data structures and integration into the specialised processes of the credit industry.
4. Outlook and Call to Action
Linking digital organisational identities and sustainable finance processes is still in its infancy, but the potential is enormous. Supported by regulatory developments such as eIDAS 2.0, SFDR, NFDR, and the EU taxonomy, verifiable identities, and ESG metrics are gaining momentum. This dynamic is driving efficiency and transparency in the financial sector, as banks can make significantly faster and more accurate lending decisions through automation. In the process, new transformational finance offerings and specialised financial products are emerging that take into account companies’ individual sustainability practices.
Creating the conditions for integrity and automating the use of verifiable ESG metrics in lending is a complex infrastructure project. Given the need to create these conditions, now is the moment for coordinated action:
- Policymakers: create regulatory frameworks that enable the effective promotion of verifiable processes for sustainable financial products.
- Banking associations: Promote structured and targeted development of industry-wide standards to enable automation, increase process integrity, and avoid fraud and greenwashing.
- Banks: Take the initiative to integrate verified ESG metrics into their credit assessment process to promote transparency and sustainability.
- Risk strategy officers: Develop risk models that take into account both financial and sustainability factors and standardise their machine verification.
- Scoring process owners: Define standardised, verifiable scoring data including the necessary trust models. Implement automated systems that use verified data to make the credit scoring process more efficient and accurate.
- Federal Ministry for Economic Affairs and Climate Protection (BMWK): Support for the development and implementation of standards for sustainable financial products.
- Federal Ministry of Justice (BMJ): Setting guidelines for digital organisational identities as the competent authority for legal persons and for the business register.
- Federal Ministry of Finance (BMF): Leading the creation of guidelines for digitalisation and regulation of the financial sector in the context of sustainability and as the authority responsible for the transparency register.
- BaFin (Federal Financial Supervisory Authority): Promotion of regulatory sandboxes for a large-scale implementation (Large Scale Pilot) for the automation of sustainable financial products and the establishment of digital identity solutions for companies.
- Banking customers: Learning about digital enterprise identities, understanding their value proposition for the business, and adoption of the technology.
This development also has implications beyond the financial sector. Legislation such as the Supply Chain Sourcing Act and the Ecodesign for Sustainable Products Regulation (ESPR) require similar verifiable metrics. Digital organisational identities can therefore increase efficiency and credibility across the value chain, from finance to the products and services offered by corporate customers.
Another relevant field is the real estate industry. Here, there are similar challenges in terms of identification, validation, and authorisation as in other ESG-relevant areas. Especially in transformation finance and the energy transition, verifiable statements on ESG metrics, energy performance certificates, and individual renovation roadmaps (individuelle Sanierungsfahrpläne, iSFP) for real estate play a crucial role.
Green bonds are designed to fund environmentally beneficial projects, forming a bridge between finance and sustainability objectives. As the demand for these bonds grows, the authenticity assurance becomes crucial to curb fraud. Here, digital enterprise identity and verifiable provenance chains play a vital role. They provide a mechanism to trace and verify the legitimate use of funds. Additionally, asset quality and verifiable green claim certificates issued by third-party auditors further substantiate the environmental impact of the funded projects while reducing financial risks for the investors. These measures collectively enhance the credibility of green bonds, ensuring that the capital raised is genuinely directed towards green initiatives, and build trust among investors and regulators in the green finance ecosystem while establishing an ‘authentic green bond market’.
In the future, we will see a broadening of use cases for digital organisational identities. The financial industry could lead the way by providing an organisational wallet service to its corporate clients directly following a KYC process. This would further increase the penetration of digital organisational identities and establish them as a key technology for a more sustainable, compliant, and efficient economy.
About Spherity
Spherity is a German decentralized digital identity software provider, bringing secure identities to enterprises, machines, products, data, and even algorithms. Spherity provides the enabling technology to digitalize and automate compliance processes in highly-regulated technical sectors. Spherity’s products for enterprise wallets and object identity empower cyber security, efficiency, and data interoperability among digital value chain actors.
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