How financial institutions meet ESG requirements through data and analytics
Banks, hedge funds and other financial industry actors are facing increasing pressure to clean up their act, and their investments. Sara Costantini explains how technology is driving change for the greener.
Protecting the environment for future generations is one of the most pressing challenges for individuals, businesses, and governments today.
Following the COP28 summit last year, where world leaders pledged to triple renewable energy capacity and reduce global emissions by 43% before 2030, the focus has now shifted to moving beyond rhetoric and translating these commitments into tangible action.
Central to this effort is the imperative for all industries, from manufacturing to financial services, to rapidly reduce their carbon footprint and transition to net zero.
Environmental blind-spots
Financial institutions, particularly banks, have the potential to drive the transition to a greener economy. However, fewer than half of financial services organisations are ‘very confident’ they can accurately report on Scope 3 emissions, while more than two-thirds (69%) feel Scope 3 reporting is a “best-guess” measurement.
In fact, HSBC’s head of Environmental Social Governance (ESG) research recently described Scope 3 emissions as the ‘elephant in the room’ when it comes to climate change. While Scope 3 emissions are a useful indicator for examining climate risk, and therefore reducing them should be the true climate ambition of companies, there’s also a need for investors to start examining disclosures more closely.
Meanwhile, a recent report from Greenpeace revealed a disconcerting reality: the investments held by the UK’s largest banks and investors emit 805 million tonnes of carbon per year, nearly double the UK’s domestic emissions. The insurance sector also faces scrutiny, with ClimateWise highlighting the challenges in measuring and disclosing financed and insured emissions.
It is crucial that financial institutions fully understand the financed emissions of not just their own business, but also those of their supply chains which often includes complex networks of varied providers across numerous different markets.
Anticipating regulatory shifts and customer demands
Financial services regulators view ESG as a priority. Globally however, the regulatory approach to ESG is fragmented, presenting a particular problem for those financial services firms operating across borders.
Regulatory reform is on the horizon in certain jurisdictions with new rules on sustainable disclosures expected. For instance, at present, the UK has no single ESG law or regulation, with policy consisting of domestic and EU-derived laws and regulations. But as part of the Edinburgh reforms back in December 2022, the UK Government announced it would be exploring a potential regulatory regime for financial providers in the UK.
Considering this growing attention from regulators, there has been an increased focus on the need for banks, financial institutions, and insurers to properly understand, disclose, and reduce their Scope 3 emissions as this will help them meet future regulatory requirements. This isn’t just important to meet upcoming regulations, but also to meet evolving customer demands.
At CRIF, our research revealed that UK consumers are increasingly likely to prefer companies that prioritise ESG considerations, with half (49%) of people saying they would prefer to use a bank or lender that is focused on protecting the environment, while two-thirds (66%) want their bank to be transparent with them about how it is run.
In today’s global market we’re seeing a new wave of solutions which can help companies to protect their reputation by minimising potential risks and putting remedies in place to deal with any ESG exposures of their customers and suppliers. Importantly, this will help firms to meet future reporting and compliance requirements with greater confidence.
The tech solution
In response to these demands, innovative tech-led solutions are indispensable for financial services firms keen to navigate the ESG landscape moving forward. CRIF’s new ESG Analytics solution – which is a new data repository and scoring service – enables banks, insurers, and other corporates to assess the ESG profile of their UK and EU based suppliers, partners and customer portfolio quickly and effectively.
ESG Analytics provides banks, insurers, and corporates with a picture of the impact of the businesses they work with today on the environment, helping to inform their decision-making in this ever-more important area.
The solution draws on over 130 key indicators derived from UK and EU information sources, analysing information on areas such as a business’s water usage, waste production, emission, health and safety record, modern slavery, and inclusiveness.
Importantly, this will help firms to meet future reporting and compliance requirements with greater confidence. By working with regulatory bodies all around the world and partners to help set the future international standard in corporate responsibility and sustainability, we ensure that we remain at the forefront of regulation so we can pass this knowledge onto our financial institution customers in the UK.
It’s crucial that those working across the financial services adopt the same mindset, as we all work to mitigate the industry’s impact on the environment and protect the planet for future generations.
Sara Constantini is Regional Director for the UK & Ireland at CRIF.
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Image: Robert Stump