Banks Are Running Out of Time To Appease ESG Regulatory Reporting

Poor data management is the key obstacle to banks achieving their environmental, social and governance (ESG) goals and complying with increasing regulatory pressure; according to new research by Avanade and Efma.

The pair’s new report, entitled ‘Taking sustainability seriously: are banks ready?’, has found that many banks are not on course to meet their ESG goals.

The report brings to light the increasing regulatory pressure banks and financial institutions are under to track and monitor their ESG progress.

Established in 2016 by Task Force, the climate-related financial disclosures (TCFD) framework has become the global standard for climate disclosures.

In 2020, New Zealand became the first country to introduce a law requiring financial services firms to report the impact of climate change on their business.

In the same year, the UK Financial Conduct Authority (FCA) announced that all publicly listed UK companies with a premium listing would need to ’comply with or explain’ the TCFD’s requirements by 2023.

According to the data, only 53 per cent of banks will be ready for regulatory reporting in the next six months, whereas almost one in five are still unclear as to what the requirements are.

Findings show that almost one third will not be ready for at least another year. Fifty-seven per cent of banks admitted that they will not hit net carbon zero operations until 2025.

Only 15 per cent have reportedly achieved this position, while just over a quarter said they will be carbon neutral in the next one to two years.

A mere 25 per cent have a workable climate risk model to hand whilst an additional third plan to be in that position in six months. The rest –  a total of 42 per cent of respondents – will not be able to test the impact of various climate scenarios for at least a year, with 12 per cent having to wait two years to get going.

In terms of the biggest challenges to climate risk analysis, almost a third of banks are struggling with the lack of integration of climate risk data with their risk management framework.

Seventy per cent of banks 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, attracting younger groups of consumers, such as Millennials and Gen Y/Z and better energy and waste management.

In addition, increasing ESG investment options to attract younger customers is now the top priority for banks, followed by greater transparency on the transition to a low carbon footprint, fuller disclosure and reporting and a greener product portfolio.

Nic Merriman, European lead for financial services at AvanadeNic Merriman, European lead for financial services at Avanade
Nic Merriman

“Clearly, some banks are struggling to get moving towards hitting their ESG goals,” comments Nic Merriman, European lead for financial services at Avanade. “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 solutions 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,” added 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.”

  • Tyler is a Fintech Junior Journalist with specific interests in Online Banking and emerging AI technologies. He began his career writing with a plethora of national and international publications.