Can banks connect the dots in their pursuit of sustainability?
Financial services firms need to keep up with the pace of change when it comes to their ESG obligations and what these obligations mean for their supply chains and product and service development.
As ESG transitions towards a matter of law and compliance, a lack of detail and focus could have very serious consequences
Almost all start-ups claim that ESG is one of their core values, but how many of them can accurately say what their regulatory requirements are in relation to ESG? Most of the pronouncements you see seem more like a communications exercise rather than a regulatory one. As ESG transitions towards a matter of law and compliance, a lack of detail and focus could have very serious consequences.
According to The Net Zero Tracker, a consortium project run by the Energy and Climate Intelligence Unit (ECIU), the Data-Driven EnviroLab (DDL), NewClimate Institute and Oxford Net Zero, there are 30 countries that have enshrined a target for net zero emissions by 2050 in law, and many more are expected to adopt similar legislation soon. Thus far, only Bhutan and Suriname have been reported to have reached this target.
Why ESG?
Historically, ESG has been treated as three separate areas of interest (environmental, social and corporate governance), with regulators opting for industry-led voluntary policy measures and only taking direct action in response to specific negative events. In 2004, the UN, in collaboration with 20 global financial institutions, published the Global Compact Who Cares Wins report explaining that, in a more globalised and competitive world, ESG should be a required part of companies’ overall management values. Following that report, a new (albeit gradual) effort ensued to focus on sustainability development that has built up to what we see today.
In its proposal for a relevant and dynamic EU sustainability reporting standard, the European Financial Reporting Advisory Group outlined that ESG is currently the most reliable framework for impact assessment of sustainability. However, as standards are expected to be adopted and amended to accommodate the progress of sustainability development, the requirements are likely to be ever-changing.
In the last several years, regulators in the European Union appear to have crossed a watershed in how they approach ESG. A proposal for a Corporate Sustainability Reporting Directive (CSRD) adopted by the European Commission in April 2021, and which came into force on 5 January 2023, is meant to begin the process of codifying an overarching regulation for impact assessment of ESG considerations.
Even though the UK is taking a different path to the EU following Brexit, it is also clearly becoming more rigorous and will become much more so over the next 10 years. The UK introduced mandatory reporting of climate-related financial information across the economy in 2022 in line with the G20’s Task Force on Climate-Related Financial Disclosures (TCFD).
Why should firms care?
According to Omdia’s IT Enterprise Insights 2023/24 Survey, nearly a third of respondents globally believe that it is a moral duty to build a better world, and 23% believe that sustainability is important to grow and retain customers. These results emphasise the fact that customers are becoming more discerning when it comes to the sustainability practices of the banks and brands they engage with.
In the graph below, the most striking feature is the gradient from those who report having a fully functional sustainability strategy (15%) down to those still in an evaluation phase (32%, or 57% when combined with those who are in the process of implementation).
Sustainability strategy in retail banking. Source: Omdia IT Enterprise Insights 2023/24 Survey.
Many organisations are still in a period of analysis despite having almost two decades to prepare. This, perhaps, points to the challenge of working with a term like ‘sustainability’, which is open to individual interpretation, if not debate, with no generally accepted benchmark in banking.
It may also be particularly challenging for retail banks or fintechs to identify what sustainability is when they do not manufacture or deliver anything. Sustainability can be a very elusive concept for a business entirely based on the delivery of a service. Because banks offer services, the majority of the regulatory burden that does exist falls on their suppliers – data centres, manufacturers of the devices through which their services are deployed and used, and the suppliers of their energy, for example. Therefore, the question moves to a focus on how banks drive sustainability through their supply chain.
The data shown in Omdia’s survey is inverse to this reality. Most banks said they had implemented a mix of low-impact internal measures like a recycling or reuse policy but were comparatively uninterested in examining what their supply chain is doing. At the same time, some have been introducing ESG-related products and services, yet the vast majority of banks do not have a well-defined sustainability strategy.
There also seems to be a lack of understanding about how regulation is changing companies’ obligations in relation to ESG reporting. There are real and increasing regulations underpinning ESG considerations which will impact firms regardless of their size and sector. These regulations may initially be seen as a bureaucratic and costly burden, especially for smaller companies, but this doesn’t have to be the case if they can find the right regtech solution that can automate delivery of the necessary information and provide metrics and insight for improvement in ESG matters without creating or amplifying areas of risk.
Once companies are obligated to report on ESG as part of their financial reporting, they will be assessed on their performance against current targets. Missing these targets could then become very problematic for them. Banks also need to understand the developments across their entire value chain and monitor progress in real time. Getting it right from the onset with correct strategic planning and access to the right data and analysis underpinned by new technology will help firms cut out the noise, avoid reputational damage as well as achieve a positive change in both their sustainability performance and the products and services they offer without compromising future business and future generations.
About the author
Ouliana Smith is a senior research analyst in Omdia’s Enterprise IT Financial Services Technology team and has 10 years’ experience in financial services. Since joining Omdia in 2022, she has focused on digital transformation in retail banking and fraud solutions with a strong interest in alternative payments.
Ouliana started her career as an associate analyst with Datamonitor, now GlobalData, a global market intelligence provider, where she specialised in cards and payments before later moving into wealth management.
Ouliana holds a first-class honours degree in mathematics from Coventry University and an upper-second-class honours degree in art history from the Open University.
