The E in ESG – Opportunity or Risk for Financial Services

Over the last decade, Environmental, Social, and Governance (ESG) policies have moved rapidly to the heart of day-to-day management in every sector. But the fundamental role financial services play in deciding what investments are made, to who, where and when means the scrutiny and expectation of effective environmental initiatives is arguably more intense for banks and insurers. Not only must they ensure their own houses are in order, but they are expected to use their financial leverage to ensure that others do so too.  Nowhere is this clearer than in the drive to promote and enforce environmentally sustainable practices across the economy. Green finance, both privately backed and in the form of government funds such as Europe’s Recovery and Resilience Facility, is driving organisations of all kinds to become more environmentally sustainable, and banks are on the front lines in enforcing this change. 

POLICY IMPLEMENTATION
These market-based influences are increasingly supported, or even accelerated by new regulation. In Europe, for example, a raft of new regulation is in place or expected, all of which has clear environmental requirements. From the European Banking Association’s (EBA) guidelines and technical standards, to the European Central Bank’s (ECB) Climate Risk Stress Test more and more regulation require detailed, ongoing and comprehensive assessment of climate risk within business models and loan books. The European Commission has included requirements to disclose environmental risks in a range of directives including the draft Corporate Sustainability Reporting Directive (CSRD), the EU Sustainable Finance Disclosure Regulation (SFDR) and its wide-ranging EU Taxonomy. 

These not only indicate greater scrutiny for financial services but highlight the willingness of governments around the world to activate banks as front-line implementers of climate policy. 

RISK OR OPPORTUNITY?
The question is, do banks see this situation as presenting additional risk or new opportunity? Recent research from Bain reveals an even split between those banks that are taking offensive postures and those who are defensive on environmental scrutiny. European banks seem more opportunity orientated with 60% seeing enhanced focus on sustainability primarily as an opportunity. The Bain research also established that whilst more than 4 out of 5 banks already offer green bonds (86%) and sustainability bonds (84%) the headroom for growth in green products was still significant. Loans for green commercial building and green car loans, for example, are both expected to grow with 73% and 65% of banks planning to offer each of these in the next three years.

But the opportunity does not only lie in ‘greening’ existing products. Banks can and should leverage their data capabilities, and understanding of risk, to help other businesses to collect and analyse data on the sustainability of their own operations. That does not mean stepping in as outsourced ‘data bureaus,’ but providing frameworks, best practice guidance and even benchmark data to these customers. The opportunities to add value to customer relationships, increase loyalty and identify new and mutually beneficial ways to engage are significant.  

DATA FOR GOOD
Data is clearly at the heart of managing the E in ESG. Whether it is to respond quickly, accurately and efficiently to increasingly detailed demands for sustainability reporting or leveraging diverse data sets to help a customer understand their true environmental risk profile – having the right data in the right place is essential. Banks need to ask themselves some searching questions in order to maximise the positive opportunities.

• Are you confident that you have the data needed to meet incoming sustainability risk assessment and reporting requirements? 
• Do you have the right data sets, at scale, to provide the insights you need to innovate new lines of business in the sustainability arena? 
• Can you back your corporate vision on sustainability with data that demonstrates impact?

In a recent article, McKinsey correctly identifies that, “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.” The article highlights in detail ‘what’ banks need to do; create a central [enterprise] data platform, a robust data governance model, avoid silos, embed ESG with core banking and avoid building up technical debt. However, it provides less in terms of practical advice on ‘how’ to achieve this.

DELIVERING THE ‘HOW’
As a powerful system of intelligence already at the core of many banks, Teradata, has direct experience of how banks can apply data analytics to deliver effective climate action initiatives.  Today climate risk analysis must be integrated into BAU and risk management frameworks for the bank and all its customers. This demands a strategic approach to data management. Teradata is expert in integrating different data types at different speeds from diverse internal and external data ecosystems. With multidimensional scalability and multi-cloud and hybrid deployment Teradata has the flexibility to support the varied degrees of complexity of analytics processing and the need to frequently recalibrate stress models and test new scenarios. 

The focus on ESG, and Environment in particular, will only intensify. The question for banks today is, do you have the data intelligence to make this more of an opportunity than a risk? Teradata has the experience of how to deploy data analytics that ensure that the E in ESG is a value driver for banks’ own initiatives and to help customers mitigate their carbon footprints.