ESG

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 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:

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. 

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. 

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