Non-retail banks are wrestling with unique data requirements and challenges as they strive to build their ESG capabilities.
A combination of factors including weak reporting standards and legacy technology is slowing wholesale lenders’ efforts to gather and use data needed to green their loan books and operations, according to IT and business consulting giant CGI.
Banks are finding it especially challenging to report on the Scope 3 emissions of their customers, which entails gathering carbon performance information on borrowers’ activities as part of the bank’s value chain. CGI vice president and global industry lead for banking Andy Schmidt said that because there isn’t enough good quality data to do that, banks have been forced to adapt.
“What we’ve seen many banks do is use this data to the extent that it’s available to drive greater sustainability within their portfolios,” Schmidt told ESG Insight. “There just aren’t standards in terms of data quality, and this makes Scope 3 reporting extraordinarily difficult.”
Although reporting may be difficult, there are opportunities for banks to make a difference in something that they do have experience with: supply chains. Banks have recent experience of rebuilding customers’ supply chains. Russia’s invasion of Ukraine forced many European firms to reconfigure how they obtained the materials and services necessary for their operations. Doing it again to improve the sustainability of customers’ partner companies would be easier if the data was there. But suppliers tend to be smaller enterprises that often don’t have the resources to gather and report the necessary data to their creditors.
Compounding the problem is an absence of guidance on how and what banks and their customers should report. A patchwork quilt of differing reporting standards drawn up by NGOs, industry groups and other organisations have sought to fill that gap, but uncertainty remains.
For example, Schmidt highlighted the inconsistencies in reporting gender representation within companies.
“One way to look at gender diversity is to ask if a firm has X-percent women, or X-percent men; that’s a partially helpful data point,” he said. “But knowing what the gender mix is at the board level is often seen as a better indicator of sustainability.
“As a result, banks are having to do the best they can with the data that they have.”
Trying Hard
Wholesale banks are aspiring to reach the levels of digitisation seen in the retail banking sector but they have needed first to overcome a host of other factors, including a reliance on legacy and manual workflows and processes.
Consequently, they haven’t had a great track record of change. And of those that have tried to digitalise, the majority have failed. A recent McKinsey report found that less than a third of banks that attempted a data-led transformation in the decade to 2021 managed to make a success of it.
The McKinsey report cites banks’ reliance on arcane tech stacks as a reason for their failure to successfully digitalise. Schmidt said that through his engagements with lenders he has found that many are busily assessing how they can reconfigure their infrastructure so that they can absorb the data and build the processes needed to put in place a robust ESG strategy.
“Modernising some of these infrastructures and being able to collect data into common tools or clouds makes it much easier to start looking at where the gaps are,” he said.
The banks that are most likely to have the greatest challenges are smaller institutions that have grown through acquisition or that have multiple legacy systems; those difficulties would be compounded for banks that are subject to both.
Schmidt’s immediate solution for aspirant banks is to begin gathering all the data they can even before they begin their transformations proper – and long before they need it to comply with reporting obligations – so that they have a feel for what they will eventually have to do in earnest.
Although regulations are rapidly being put in place, requiring banks to report the ESG performances of their loan books and their own operations, Schmidt believes that the gather-now approach will put lenders in a stronger position than if they waited until the last minute to put their processes in place.
“We’re encouraging them to start collecting the data in whatever form it is, from whatever source it is, and just start analysing it – figure out what story it is telling them,” he said.
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