In the last article, we discussed multiple reasons why sustainable banking makes business sense for banks. The move towards sustainable banking is here to stay, and there is increasing regulatory and customer pressure on banks to accelerate their ESG agenda. This blog will discuss some of the regulations shaping sustainable banking agendas, challenges banks can expect, and technology solutions that will make this transition easier.
Regulatory stance on sustainable banking practices
While regulatory bodies have started considering ESG practices when it comes to banking, most current regulations are voluntary. However, certain bodies list sustainability principles and track the sustainability standards of companies.
For instance, globally, the United Nations Environment Program Finance Initiative (UNEP FI) has laid down responsible banking principles and guidelines. As of 2019, 130 banks representing US$47 trillion in assets have adopted the principles, and many more financial institutions are making their sustainability commitments public. The participating banks:
- Identify the most significant impacts of products and services on the societies, economies, and environments that the bank operates in.
- Set and achieve measurable targets in a bank’s areas of most significant impact.
- Publicly report on progress on implementing the principles, being transparent about impacts and contributions.
In the U.S., financial regulators have been slow to address climate change when compared to jurisdictions such as the E.U. and U.K., but the scenario has changed from 2021. The Federal government is pushing U.S. investors and corporations towards sustainability. Texas, for example, passed a bill that prevents state pension plans and investment funds from investing in businesses with ties to the oil and gas industry. Recently, President Biden also required financial institutions and corporations to disclose the climate change risks they face.
As the regulatory landscape shapes up, it’s clear that current data and insights around ESG will not be enough going forward. Banks will need deeper insights into the businesses they invest in and the decisions they make to stay compliant with ESG regulations.
Leveraging technology to overcome ESG data challenges
There are several ESG-related data challenges that we foresee. Banks will need to start implementing technology solutions to address these in time.
- Inadequate ESG reporting and disclosures: Automation technologies such as robotic process automation (RPA) can help firms automate the rapid collection of data regarding their ESG performance. It can assist in increasing the frequency and accuracy of ESG disclosures. Additionally, AI-powered models can leverage historical data to provide realistic and predictive ESG reporting.
- Lack of standardization: Technology can be an excellent tool for regulators in formulating standard policies and procedures required to measure and report ESG data. It can help analyze substantial amounts of quantitative and qualitative data. Timely qualitative data helps investors and rating agencies be well informed and aids in the formation of common minimum standards.
- Absence of ESG-specific accounting rules: AI-powered solutions can aid in quantifying the qualitative ESG data. The availability of quantitative ESG data will help create a framework to measure ESG performance and accounting rules.
- Inconsistency and non-comparable data: Technology allows algorithms and computer programs to read information to fill data gaps and solve data problems. This can resolve inconsistencies in ESG datasets across different data providers. As a result, investors can make well-informed decisions by comparing the data and ratings from various data providers.
- Accessibility: Technology makes it possible to create and maintain a single data repository for all ESG-related information and can bring meaning and usability to previously unstructured data.
While rethinking their business stance and orienting it to ESG goals will be a significant focus area for banks, technology will be a key factor in ensuring a rapid pivot to sustainable banking. Over the coming years, we see rising investments in digital technology that enables ESG integration and a slew of innovative and collaborative solutions from technology vendors.