ESG for banks – how to elevate the game to achieve key goals

The UN estimates that spending $7 trillion each year is needed to get closer to its Sustainable Development Goals by 2030, and 6 out of the $7 trillion is reliant on the private sector. As two-thirds of the financing must be provided by banks, their role is instrumental in achieving the Goals.

The good news is that banks across the globe have now put sustainability at the forefront of their growth mission. With frequent announcements of new climate alliances and partnerships around their ESG commitments, it is evident that intent and motivation are at a high. However, as regulations and reporting guidelines tighten and the price of carbon sores, financial institutions are constantly exploring more extensive models to deliver on their sustainability promises.

At Capgemini, through our thought leadership in sustainability and consistent innovation, we have identified the following key pillars that we believe are integral for the success of your climate strategy.

COMMITMENT

With customers’ attention and loyalty to ESG criteria increasing, it is essential for banks to define a realistic sustainability agenda and ensure it is communicated right. It must encapsulate clearly stated targets in specific areas with metrics in place to achieve them. With Capgemini’s Sustainable Vision Matrix, we can enable the assessment of the bank’s vision and position them according to their ESG ambitions.

To see how the market rewards their commitment, engaging stakeholders (customers, regulators, investors, NGOs) is imperative to support the transformation and create visibility in the ecosystem. Banks need to engage their clients and partners toward a social economy and rethink the brand experience. However, this is possible only if their own employees share the vision and path forward. This will demand a cultural shift to support the transition, and employees will be responsive only if they understand the “why?” and the “how?” through awareness and trainings.

ACTION

We are seeing increased proliferation of key climate themes such as net zero, decarbonization, financed emissions, and substantial investments in green financing. Banks are aggressively building sustainability into their products with innovations such as recyclable cards, loyalty points to incentivize a low-carbon lifestyle for retail banking, or financial products like green bonds for investment banking. While experiments continue to innovate the offer portfolio, financing the transition and footing new green businesses will continue to take center stage. Focused initiatives, programs with targeted investing plans, and adoption of green IT practices to propel the agenda must continue.

MEASURE

We shall talk about this across 3 key components.

Internalize Governance

With commitments made and actions taken, banks now need a strong governance structure for climate impact that runs throughout the organization. Climate risk needs to be established as a principal risk and integrated into the enterprise risk management framework, i.e. a principal risk framework coupled with a risk appetite assessment: an interplay of audit and risk monitoring along with a clear line of reporting and escalation mechanism. The board / top management lays down the broader theme and ESG action plan with the stakeholders, and decision makers across business areas are made accountable for the carbon impact their decisions have.

Monitor (Metrics & Targets)

Once the necessary indicators (KPIs) for climate risk monitoring and management are in place, banks will then require the right infrastructure to achieve them. Sophisticated tracking mechanisms such as Capgemini’s intricate ESG data supply chain can enable a repeatable, industrialized process for keeping ESG data relevant, current, and exploitable on an ongoing basis as an enterprise-wide asset.

To augment their metrics and targets, institutions must continue to develop their methodology, adding granularity in tracking and updating external client and industry data as these become available over time. An increasing number of benchmarks and risk scoring models are under development and simultaneously being adopted – e.g. Moody’s CreditEdge model, Four Twenty Seven’s physical risk scores, the CDP (Carbon Disclosure Project), NGFS 2020, and others.

Stress Testing

Recently, the Bank of England (BOE) and the European Central Bank (ECB) published their climate stress tests as a learning exercise to assess banks’ climate-risk preparedness. Though currently limited in scope, other banks are expected to follow their lead in devising their own stress tests, which will soon be made compulsory.

To achieve a forward-looking climate risk strategy, banks must evaluate the climate impact across the short, medium, and long-term horizon. Once deviations are captured, they can run simulations with different permutations and combinations of their climate action plan and consistently realign their efforts in the right direction. Scenario analysis across all business activities/sectors will help identify the underlying physical as well as transition risk.  Furthermore, it will evaluate the potential impact on their balance sheets and how productivity improvements will compensate for losses in certain sectors due to the increased carbon prices.

DISCLOSURES

The current ESG disclosures landscape can be overwhelming at first glance. Especially with greenwashing allegations, tighter scrutiny, and regulatory interventions on the rise. Right reporting on climate strategy goals and disclosures on the progress made are critical to showcasing the value created by banks.

Establishing credibility in the ESG space will be achieved through increased transparency at a granular level. Demonstrating strong compliance to reporting standards such as TFCD (Task Force on Climate-Related Financial Disclosure), GRI (Global Reporting Initiatives), and SASB (Sustainability Accounting Standards Boards) will help communicate the right message to stakeholders and reduce the inherent transition risk.

Our sustainability framework is designed to empower and support you. We are committed to partnering on your climate transition journey and helping you mobilize impactful, sustainable actions to reinvent your organization.

As a globally renowned technology and digital leader, Capgemini inherits the responsibility, the ambition, and the means to contribute to solving major societal questions that shape our world – and with climate change at the heart of our group priorities, we are contributing to making this ambition a reality.

AUTHORS

Rishi Vijay – Senior Director 

Prashant Singh – Manager – E.L.I.T.E. GMP