Sustainability-related data: Challenges and opportunities for banks

Sustainability has long been a vague buzzword, often popping up in product promotions and promises of companies to save the planet. Financial institutions promote “ESG (environmental, social, governance) investing”, but it’s often not clear what criteria have been used in ESG assessments of assets. We are seeing a rapid change now: promoting a product or service as green while it is not (called greenwashing) is heavily penalized, and stating vague ambitions to become sustainable as a business is no longer being accepted.

Pressure is rising from consumers, shareholders, and regulators to start living up to promises. Sustainability is moving from ‘nice to have’ to ‘need to have,’ especially for financial institutions. Regulators expect banks to be the front runners of the transition to a sustainable society. To this end, many regulations and guidelines have been introduced and new ones are on their way. To name just a few, the NFRD, EBA Pillar 3 ESG, EBA LOM ESG, and the ECB Guidelines on climate-related and environmental risks are currently being implemented. The upcoming CSRD, which will replace the NFRD, will require continuous high efforts from banks.

As the old saying goes, ‘You can’t manage what you don’t measure’. That is why this first set of regulations, which are highly interlinked, mainly focuses on measuring sustainability. As banks’ impact on the environment and society, and the impact of climate change on banks, mainly run via the companies and activities that they finance, banks need to measure and report on ESG metrics of their clients. And to do that, a lot of data is needed. Think of energy labels of collateral, the greenhouse gas (GHG) emissions generated by large corporates and SME clients, and the loans provided to companies or projects that are EU Taxonomy aligned, i.e. can be considered sustainable according to the EU Taxonomy, which classifies which activities count as sustainable on a very detailed level.

Banks, together with large publicly listed companies, are the first that are obliged to report in compliance with the CSRD, as of financial year 2024. The mostly voluntary NFRD climate guidelines of 2019 gave banks the opportunity to start preparing for the mandatory CSRD. With CSRD’s additional requirement of limited assurances from the auditor, there is no more time to waste, and banks should start addressing the data challenges today.

Opportunities

There are also opportunities arising from sustainability. Most banks are already offering sustainability-linked products, where, for instance, the interest rate of a loan depends on pre-set sustainability targets. But there are still other opportunities that can be seized:

Client advisory

Business clients often need steering regarding their own ESG data, while some regulations also apply to them. As a result of the steep learning curve for banks driven by these regulations, their expertise can be useful to their clients, not only by creating awareness among clients of the upcoming mandatory regulations, but also by offering help with increasing their data availability. This is a win-win as banks require this data from their clients as well. As an example, “Life Cycle Assessments” can be offered as a service, which is a method to calculate GHG emissions from products and services.

Embedding sustainability in banking apps

Customers are increasingly aware that the choices they make have a large impact on the environment. Many people want to lower their impact, but lack the information required to compare products and make informed decisions. Since in most cases short-term rewards are missing to make the most sustainable choices, most people base their decision only on the price of a product. By combining transaction data with GHG data, and by including a gamification element (rankings, levels etc.) a “carbon tracking app” can be built. By embedding this feature in existing banking apps, these apps can become the new medium for customers to help realize their desire to lower their impact.

Measuring sustainability is just a first step and not a goal by itself. With insights in the current ESG performance of banks and companies, goals can be set on for instance GHG reductions, and progress can be monitored. Before this becomes enforced by law, it is recommended to start shaping the road to a sustainable future now.

Capgemini has experience in helping clients tackle sustainability data challenges and implementing end-to-end solutions. We translate regulatory requirements to concrete solutions by assessing and partnering with numerous data sources across geographies, while also designing models and proxies to fill in blanks. Capgemini also offers support on seizing the opportunities from sustainability with our Life Cycle Assessment capabilities and Carbon Tracker Application offering. We also help our clients in shaping carbon reduction strategies and implementation roadmaps.

Interested to know more? Please contact one of our experts.