As an international finance centre, Hong Kong has committed to advancing its position as a leader in ESG and green and sustainable finance. Regulatory efforts to support the banking sector have focused on laying a solid foundation by building capacity, developing policy and providing resources (such as data and analytics) and practical guidance.
At the same time, banks in Hong Kong have made progress in understanding the climate-related risks in their portfolio, and the financial implications. They have set climate strategies and taken steps to improve the quality of their climate-related disclosures. Some banks have committed to intermediate (2030 or sooner) and long-term (2050 or sooner) emission reduction targets, in respect of their own operations as well as their lending and on-balance sheet investment activities.
In a related move, banks have also been taking steps to acquaint clients with green and sustainable finance products to help them reduce their own carbon emissions.
With many clients in the real economy only starting to understand their climate and transition related risks, the availability of complete, accurate and reliable information is a concern for many banks. Greenwashing risks and regulatory and public scrutiny often deter banks from taking more progressive action. The HKEX’s proposals to mandate climate related disclosures aligned with ISSB standards1 by 2025 is a welcome development. This will not only pave a path to greater transparency, reliability and comparability globally, but also greater accountability. For banks, this means accountability in their role as agents for change for their stakeholders, including real economy clients.
Within this role, there are three priorities where the banking sector should take a lead: proactive client engagement, collaboration and partnerships with service providers, and becoming a guardian of data.
Proactive engagement with clients brings competitive advantages
Many have likened the booming development of ESG and sustainability to the digital developments in the banking sector in the middle of the last decade. Banks transitioned from a paper-based account opening process that took an average of six weeks to complete, to a fully digital onboarding process that takes around five minutes. This has increased customer loyalty, and has been key to cost reduction.
The transition to ESG is creating opportunities for banks, but there are also hurdles. Most banks acknowledge the role they can play in directing finance to projects that deliver a positive environmental or social outcome and help their clients transition to sustainability. However, when it comes to engagement with clients, client-facing staff often do not feel equipped to proactively initiate this contact.
Providing role-based training to client-facing staff that positions them to critically diagnose their clients’ needs and opportunities is a good starting point. Such training should be integrated with the workflow of the role, allowing for continuous practical application. Client-facing staff should be equipped to provide insights and data to drive client conversations, identify strategic opportunities and explain how the bank can finance the client’s sustainability objectives.
A good way for client-facing staff to engage with their clients is by providing insight on sector trends and how their clients are performing compared with their peers. A good source for this information may be within the bank’s own transition plan, which will include sector-specific carbon reduction goals and granular sectoral transition plans; as well as transition plans of their clients.
Proactive early engagement with clients is necessary to ensure the bank is well-positioned to reap the benefits. Other than customer loyalty, early studies indicate that financial performance will start to differentiate between pioneers, followers and laggards as early as 2030. By 2050, pioneers will see profit growth between 25%-30%, whereas followers are at 5-10% and laggards are at -10-20%2.
Collaboration and partnerships with service providers
Collaboration with service providers across sectors and jurisdictions is crucial in the fight against climate change. Working together is no longer optional, it is an imperative. However, few banks are leveraging their existing relationships due to the way programmes are generally set up.
Service providers are managed from the perspective of third party risk and compliance with regulations. When it comes to addressing pressing economic, social and environmental pressures that affect businesses globally, this approach excludes them as potential candidates for collaboration.
But what if service provider relationships were not managed as a risk, but engaged with as a business proposition? This could open up new collaboration opportunities and a mutually beneficial relationship. Some questions that banks can ask include:
- • Which service providers might be able to augment climate-related or sustainability-related datasets based on the clients they serve and the nature of service they provide?
- • Which service providers could enable the bank to grow its formal and informal networks and scale the delivery of sustainable finance solutions? For instance, which service providers have access to industry associations or government departments, or otherwise have influence within their sector?
- • Are there service providers that provide an effective technological solution in one area of the business that can be leveraged for sustainability goals? Which service provider’s solutions will optimise customer loyalty to the bank’s sustainability brand?
- • Which service providers are able to provide technical expertise which can be leveraged to provide the banks’ customers with support on sustainability?
Critically, to get more value out of relationships with service providers, a starting point is to see them as potential candidate partners with whom banks have a shared goal on sustainability, and a shared intent to co-create solutions for pressing ESG problems.
Becoming a guardian of data
Knowledge and capability development – Data is already crucial to ESG and will play a more prominent role in the future as everything from risk management, performance measurement and reporting is dependent on the availability of good quality data. Banks will also need to ensure they have reliable data to meet regulatory obligations. This is especially pertinent where data transparency will be driven by assurance requirements.
Banks are faced with a number of ESG data challenges. The issues include whether the data that is currently available is sufficient to fulfil disclosure needs, not only in relation to support the basis for disclosures made, but also in relation to Scope 3 emissions and scenario analysis. More scrutiny is expected on whether data sourced is accurate, credible and at the level of granularity needed. There are also questions about the consistency, transparency and auditability of the data based on which decisions are made.
Where there are known gaps and limitations in data, banks should proactively manage expectations of both internal as well as external stakeholders. They should be transparent about data limitations and/or uncertainties associated with the data and the potential impact these limitations could have, and should communicate the consequences clearly.
From a data governance and data management perspective, banks should ensure ESG-related data is handled appropriately, in compliance with relevant laws and regulations, and commensurate with the levels of risk associated with the data, and monitored with the same rigor as conventional financial data. They should also review if the data quality standards and control measures are adequate; and continuously review and update processes and standards in line with the latest regulatory requirements.
Banks should also review and make sure that they fully understand their data sourcing and data ingestion methodologies and traceability measures. This will provide guidance in identifying required KPIs and metrics. It will also enable them to evaluate ESG policies and management systems, and deploy more advanced analytics to support the generation of better quality insights.
1 The International Sustainability Standards Board (ISSB) Climate Standards that builds on the principles of the Task Force on Climate related Financial Disclosures (TCFD) recommendations and sets out detailed climate disclosures