Environmental, Social, and Governance (ESG) policies have become more prominent in recent years and has moved to the heart of day-to-day management in all industries. For financial services, in particular, ESG has an important part to play in deciding what investments are made and to whom. Green finance is an example of delivering the ‘E’ in ESG. For privately backed and government funds such as the Recovery and Resilience Facility in Europe, are driving organisations across the continent to invest in their environmentally friendly and sustainable agendas, and banks spearheading this change.

Green regulation

The push towards green finance and sustainability is influenced and accelerated by new regulation. Both the European Banking Association’s (EBA) guidelines and technical standards, and the European Central Bank’s (ECB) Climate Risk Stress Test, have clear environmental requirements at its heart.

In addition, the European Commission has included requirements to disclose environmental risks in a range of regulations including the draft Corporate Sustainability Reporting Directive (CSRD), the EU Sustainable Finance Disclosure Regulation (SFDR) and its wide-ranging EU Taxonomy. As such, ongoing and comprehensive assessment of climate risk within business models and loan books are key to deliver sustainable financial outcomes.

These regulations are not only indicators of greater scrutiny for financial services, but also highlight global governments wanting to activate banks as front-line implementers of climate policy.

But, is this a risk or an opportunity for financial service operators?

According to research from Bain, there is an even split between those banks that are taking offensive postures and those who are defensive on environmental scrutiny. The research found that 60% of European banks are more opportunity orientated and see enhanced focus on sustainability as an opportunity.

As well as this, even though 86% of banks offer green bonds and 84% offer sustainability bonds, the growth for green financial products is still significant. As such, over the next three years, both green commercial building and green car loans are expected to grow with 73% and 65% of banks planning to offer each of these.

Yet, banks should go beyond ‘greening’ existing products. Rather, they should leverage their data capabilities and understanding of risk. This will go a long way to help other businesses collect and analyse data on the sustainability of their own operations.

But there is a point of caution. Banks should not be stepping in as outsourced ‘data bureaus’, but instead, should provide frameworks, guidance on best practice and benchmark data to these customers. Financial service operators have a number of opportunities to add value to their customer relationships, as well as to increase loyalty and identify ways to better engage with their customers.

How can data be used to manage the E in ESG?

Data is at the heart of financial service operations and is the key to managing the E in ESG. It could be used to respond efficiently and accurately to detailed demands for sustainability reporting or banks could leverage diverse data sets to help their customers understand what their true environmental risk profile is. The right data in the right place is essential.

Although, before financial service operators begin on this journey, they need to ask themselves some searching questions to maximise positive outcomes. These include understanding whether they have the right data to meet incoming sustainability risk assessment and reporting requirements, if their data sets can provide the insights needed and if their corporate vision on sustainability is reflected in the data.

According to McKinsey, “To meet these [ESG] expectations, banks must adapt their IT systems to systematically collect, aggregate, and report on a broad range of ESG data. However, many financial institutions still do not have a comprehensive approach to integrating ESG data into their existing risk reporting.” What banks need to do is create a central enterprise data platform, with a robust and non-siloed data governance model, which embeds ESG with core banking processes. They must also avoid building up technical debt. But how can banks do this in practice?

Delivering the ‘E’ in banking operations

Financial service operators already have a powerful system of intelligence at their core, and can leverage this to deliver effective climate action initiatives. Yet, for this to be truly successful, climate risk analysis must be integrated into a risk management framework and BAU, which is accessible to the bank and their customers.

For this approach to work, a strategic view on data management is needed. Using multidimensional scalability along with multi-cloud and hybrid deployment, it ensures flexibility to support the varied degrees of complexity of analytics processing. It also mitigates the need to frequently recalibrate stress models and also enables the testing of new scenarios.

Banks and other financial service operators will continue their focus on ESG, with more attention placed on the environment. But they must evaluate their processes to ensure that they have the right data intelligence to make this an opportunity, rather than a risk.

Banks must know how to deploy the right data analytics processes which ensure that the E in ESG is a value driver for themselves and can also help their customers mitigate their carbon footprints.

Simon Axon is Financial Services Industry Director, International at Teradata