Avanade, a leading Microsoft solutions provider, and Efma, a global, non-profit organization created by leading banks and insurers has written their latest report – stating that many banks are well short to meet their environmental, social and governance (ESG) goals.
Depicting how banks and financial institutions are currently claiming they are under increasing regulatory pressure to track and monitor their ESG progress, the report, entitled “Taking sustainability seriously: Are banks ready?” share their key findings:
- Only 25% currently have a climate risk model ready. A third (34%) plan to be in that position in six months. The remaining (42%) will not be able to assess the impact of various climate scenarios for at least a year, with 12% having to wait two years.
- Only half of banks (53%) will be ready for regulatory reporting in the next six months, whereas almost 1 in 5 (18%) are still lacking clarity as to what the requirements are and almost one third (29%) will not be ready for at least a further year.
- By 2025, over half of banks (57%) admit they will not hit net carbon zero operations. Only 15% stated they had already hit their target, while just over a quarter (26%) said they will be carbon neutral in the next 1-2 years.
- The biggest barrier to climate risk analysis is data integration – almost a third of banks (32%) are not dealing well because of the lack of integration of climate risk data with their risk management framework.
The majority of banks (70%) see their ESG work as having a positive impact on their market reputation and credibility. This was the top benefit, followed by balance sheet protection (50%), attracting younger groups of consumers, such as Millennials and Gen Y/Z (44%) and better energy and waste management (34%).
Furthermore, increasing ESG investment options to attract younger customers is now 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%).
The Climate-related Financial Disclosures (TCFD) framework established in 2016, developed by the Task Force, leading to them being the global standard for climate disclosures. 2 years ago, New Zealand became the first nation to force businesses to report the impact of climate change on their business. In the same year, the UK Financial Conduct Authority reported that all publicly listed UK companies with a would need to ’comply with or explain’ the TCFD’s requirements by next year.
Nic Merriman, European Lead for Financial Services at Avanade states: “Clearly, some banks are struggling to get moving towards hitting their ESG goals. Whether it’s disclosure and reporting, having a climate risk model up and running or making hard choices about whether and where to discontinue client business, there is still plenty to do. Integrating climate data with risk management frameworks is a major concern. The good news is that there are technology solution to support banks as they face increasing regulatory pressure and the need for improved data management.”
“Banks have moved beyond merely including ESG goals in their mission statements,” says John Berry, CEO of EFMA, “They are now looking at how they can enact sustainable change. Banking leaders do not view sustainability as a challenge, but a major opportunity – probably the biggest one over the next decade.”
If banks are to meet the challenges of successfully switching to a low carbon economy, they will have to focus on five areas:
- Creating robust stress testing and scenario analysis for climate risk;
- Leveraging technology to obtain data more effectively, thus generating better reporting scenario planning and risk management;
- Making hard choices about where to disinvest completely to demonstrate a clear transition program to a low-carbon investment portfolio;
- Showing full transparency in their operations;
- ‘Lean into green’ through their product portfolio in order to attract younger customers.
Covering 25 states, Efma and Avanade conducted online research between November 2021 and February 2022. The survey had 51 respondents from Europe (68%), North America (16%), Asia Pacific (10%) and Africa (6%). In addition, Efma conducted ten in-depth qualitative interviews with executives from the following banks: ABN AMRO, Banorte, BBVA, Caixabank, Desjardins, Deutsche Bank, ING, Maybank, Novobanco and Standard Chartered Bank.
Source: Sustainability reports