A report from Avanade, a Microsoft solutions provider, and EFMA, a non-profit organisation created by leading banks and insurers, has found that many banks are not on course to meet their environmental, social and governance (ESG) goals. The report, entitled “Taking sustainability seriously: Are banks ready?”, highlights how banks and financial institutions are under increasing regulatory pressure to track and monitor their ESG progress.
What were the findings of the study?
- Only half of banks surveyed (53%) will be ready for regulatory reporting in the next six months, whereas almost 1 in 5 (18%) are still unclear as to what the requirements are and almost one third (29%) will not be ready for at least another year.
- Over half of banks surveyed (57%) admit they will not hit net carbon zero operations until 2025. Only 15% stated they had already achieved this position, while just over a quarter (26%) said they will be carbon neutral in the next 12-24 months.
- Only 1 in 4 banks surveyed have a climate risk model ready now. A third (34%) plan to be in that position in six months. The rest (42%) will not be able to test the impact of various climate scenarios for at least a year, with 12% having to wait two years.
- Data integration is the biggest challenge to climate risk analysis – 32% are struggling with the lack of integration of climate risk data with their risk management framework.
What is the ESG landscape among financial institutions?
70% see ESG work as having a positive impact on reputation and credibility. This was the top benefit, then balance sheet protection (50%), attracting younger groups of consumers, like Millennials and Gen Y/Z (44%) and better energy and waste management (34%).
In addition, increasing ESG investment options to attract younger clients is the top priority for banks (42%), followed by greater transparency on the transition to a low carbon footprint (36%), fuller disclosure and reporting (34%) and a greener product portfolio (32%).
Established in 2016, the Climate-related Financial Disclosures (TCFD) framework, developed by the Task Force, has become the global standard for climate disclosures.
In 2020, New Zealand became the first country to introduce a law requiring financial services firms to report the impact of climate change on their business. In the same year, the UK Financial Conduct Authority announced that all publicly listed UK companies with a premium listing would need to ’comply with or explain’ the TCFD’s requirements by 2023.
Saurabh Verma, Financial Services Lead at Avanade Australia says: “The biggest challenge for banks in Australia is in keeping up with the pace of changes in regulations, while supporting their clients on ESG. There is a fair investment of time, energy and capacity that is required.”
“The opportunity is to look at innovative ways to solve sustainability challenges effectively – such as using technology solutions, external and internal data sources, and partnerships to provide banks with the capabilities and insights they need to realise their ESG goals.”
“Banks have moved beyond including ESG goals in their mission statements. They are looking at how they can enact sustainable change. Banking leaders view sustainability as a major opportunity – probably the biggest one over the next decade,” says John Berry, CEO, EFMA.
How can banks efficiently meet ESG goals?
If banks are to meet the challenges of successfully transitioning to a low carbon economy, they will need to focus on the following important five areas:
- ‘Lean into green’ through their product portfolio to appeal to younger clients. Those who can combine business agility with greater use of data and intelligence will likely be leaders.
- Creating robust stress testing and scenario analysis for climate risk
- Showing full transparency in their operations
- Leveraging technology to capture data more effectively in order to generate better reporting, scenario planning and risk management. They will face gaps in data sources, data models, and capabilities which could be addressed through partnerships.
- Making hard choices about where to disinvest completely to demonstrate a clear transition program to a low-carbon investment portfolio.
For more information about the challenges facing banks, as well as how technology can help them to achieve their ESG goals, download the full report here.