BankingCan technology help banks focus on their evolving ESG mandates?

Can technology help banks focus on their evolving ESG mandates?

Investing in the right technology has played a significant role in helping banks meet new ESG mandates now at the heart of banking

In May 2022, one of the largest banks in the US was fined $1.5 million over ESG fund misstatements.

While this was the first financial penalty to be issued in response to ESG rules, it may not be the last, given the growing global focus on environmental, social, and governance (ESG) goals.

Regulated financial institutions are under pressure to comply with both international and national regulatory mandates. They must do so by establishing and demonstrating sustainability policies, practices, and procedures to track, measure, and disclose how much their banking strategies impact the environment.

The ESG mandate for banks is underway

The Sustainability Accounting Standards Board (SASB) was founded in 2011 while the International Sustainability Standards Board (ISSB) was instituted during the COP26 climate conference held in Glasgow in November 2021.

These boards are constantly reviewing and improving sustainability and ESG compliance standards and guidelines for organisations across industries.

From an ESG reporting perspective, the current standard published by the SASB for the commercial banking industry provides banks with guidelines to produce consistent and comparable ESG disclosures and information expected from all stakeholders.

Accounting metrics include initiatives around financial literacy and inclusion, systemic risk management, and reporting of data security breaches. The Partnership for Carbon Accounting Financials (PCAF) helps financial institutions in assessing and disclosing their greenhouse gas emissions of loans and investments.

Today, those in the banking industry cannot get away with simply talking about their ESG goals. They must also demonstrate how they have incorporated sustainability into their risk management frameworks and through disclosure of climate, environmental, social, and corporate governance.

In these disclosures, banks need to explain how these factors influence their capital allocation, financing, investment, and pricing mechanisms. After all, these decisions will, in turn, influence their prospective investees’ ESG disclosure strategies.

Alongside the standard-setting bodies, central banks around the world have joined the fray; the European Central Bank (ECB), for example, is one of the driving forces behind Europe’s goal of climate neutrality by 2050.

More broadly, the financial sector as a whole is making progress. In fact, a global financial institution made 30% energy savings in its effort to decrease energy consumption and reduce the carbon footprint of its facilities.

Growing MSME support

Banks are becoming trusted partners of the micro, small and medium enterprise (MSME) community that brings in 90% of businesses, 60-70% of employment, and 50% of GDP worldwide.

Bank Rakyat Indonesia (Bank BRI), the world’s largest microfinance institution and Indonesia’s leading digital bank, has become the country’s champion MSME lender thanks to a first-of-its-kind, fully digital lending system that disburses a loan in two minutes.

Similarly, Paytm Payments Bank in India is going all out to push the MSME segment into the country’s mainstream economy by offering digital business banking solutions that make it easier for SMEs to access credit and loan facilities essential to their growth and innovation capabilities.

A Thai bank implemented a Loan Origination solution to expedite loan processing and approvals to over 500,000 customers – at least 30% of them had been excluded by other lenders, earlier.

The role of technology

In all the examples mentioned, investing in the right technology has played a significant role in helping banks move away from legacy operational styles and go digital, giving them the scale and versatility to meet modern-day banking needs.

In parallel, addressing the specific challenges and risks attached to climate and more recently, the pandemic has also firmly established technology at the heart of modern banking.

For instance, banks, which had to mitigate physical risks exacerbated by the pandemic, provided uninterrupted services by implementing end-to-end digital banking services to enable back-office functions and online self-servicing capabilities for customers.

Banks have addressed transition risks by embedding climate risks in their overall credit and operational risk management strategies. Digital loan underwriting applications, which are completely rule-based, now factor in climate-related risks to help pricing and credit decisions.

To fulfil net-zero obligations, certain banks have strategically segregated loan exposures into identified credit portfolios as per the PCAF and leveraging technology to gather data points and calculate attribution factors for exposures.

Looking ahead

In October 2020, the president of the ECB, Christine Lagarde, tweeted asking all central bankers to “think about whether or not we are taking an excessive risk by simply trusting mechanisms that have not priced in climate change.”

As sustainability and ESG continues taking up more of the limelight in the future, there will be stronger enforcement by regulators, governments, and citizens who will expect organizations across industries to commit to forward-thinking ESG initiatives that will shape the world of business and communities at large.

It is time for financial institutions with their power to influence businesses and economies to embed ESG goals in all aspects of their own operations. After all, sustainability is no longer a fashionable accent but the language in which banks must walk the talk, going forward.

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