Banks face ESG data challenges

IFR 2432 - 07 May 2022 - 13 May 2022
4 min read
Americas, EMEA, Asia
Tessa Walsh

Poor ESG data management is making it harder for banks to reach their net-zero goals as the scramble accelerates to put new technology systems in place to meet new regulatory and reporting requirements.

Many banks are still at an early stage of creating the new systems that will be required to disclose ESG data, according to technology advisory firm Avanade, which recently completed a survey of 51 banks in 25 countries with non-profit EFMA.

Only 53% of banks worldwide will be ready for regulatory reporting in the next six months, 20% are unclear what the requirements are and 29% will not be ready for at least another year, according to the survey.

“Clearly, some banks are struggling to get moving towards hitting their ESG goals,” said Nic Merriman, European lead for financial services at Avanade, which offers advisory services across Microsoft’s systems.

Banks are facing a battery of new reporting requirements over the next 12 months that include the European Central Bank’s climate risk stress test and UK listed companies have to start disclosing under the Task Force on Climate-related Financial Disclosure by 2023.

Diverse systems

Banks run diverse technology systems and are investing heavily in new technology to help with ESG disclosure and reporting, run climate risk models and analytics and meet climate standards, as well as process unaudited emissions data from their corporate clients.

The new systems will also underpin decision-making about whether or not to continue to lend to high-emitting clients. Two-thirds of banks surveyed have yet to discontinue any client business while 25% have stopped working with one to five clients.

Many banks are still facing significant challenges to get ready to meet reporting requirements and are running into issues with data integration, governance and provenance as they try to extract information from different sources to create a single ESG repository for reporting.

“Being able to get that data out of an ungoverned data set into more robust data structures and technology that allows it to be analysed more effectively is an area of focus,” Merriman said.

Banks need ESG data to analyse their own carbon footprints via direct Scope 1 emissions and indirect Scope 2, as well as indirect Scope 3 data on their customers’ financed emissions and supply chains. More than half of the banks surveyed (57%) will not reach net zero on their own footprint until 2025.

“Banks, in particular, have their data in a lot of different silos across the organisation. If you just look at Scope 1 and Scope 2, that is a problem but when it comes to Scope 3, being able to understand the carbon emissions, from a loan-backed book or for a mortgage-backed book, for example, is more difficult because banks have to gather and create datasets,” Merriman said.

Data problems mean only 25% of banks have a climate risk model ready now and another 34% plan to have one in place in six months, but 42% will not be able to test climate scenarios for at least a year, and 12% will have to wait two years.

Integration challenge

Data integration is the biggest challenge to climate risk analysis and 32% of banks are struggling to embed climate risk data in their own risk management framework.

“Integrating climate data with risk management frameworks is a major concern,” Merriman said.

Banks’ data operations are now getting full attention at the board level, not only to stay relevant to customers but also to alleviate the possible risk of stranded assets.

Banks will need to focus on transparency, robust stress testing and scenario analysis for climate risk, capturing data better for reporting, scenario planning and risk management and making choices to disinvest or transition to a low-carbon portfolio, the survey said.

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