Banks still have a lot of work to do if they are to bring their data and technology systems in line with their reporting obligations under established and looming sustainability regulations, according to a leading provider of compliance solutions.
While European lenders are in a stronger position than their overseas counterparts, they are still struggling with the “massive change” in their operating models that ESG requires, according to Stella Fau Clarke, chief strategy officer at Dublin-based Fenergo. But time isn’t on their side, as deadlines for net-zero fast approach.
“ESG used to be more of a marketing tool, something you would disclose in prospectuses but now it’s becoming a regulation that is forcing banks to make fundamental changes in the way they operate,” Clarke told ESG Insight. “They are all taking the subject very seriously but the response has been far from uniform. Honestly, they could do better.”
Regulatory Wave
Clarke’s comments follow the publication of data by ESG Book, a data vendor, that showed the number of ESG regulations introduced since 2011 has increased by 155 per cent. The report said financial institutions were finding it difficult to keep up with such rapid changes, which are likely to be just as transformative in the next decade.
The ESG Book data was obtained from its Reporting Exchange, which was created by the World Business Council for Sustainable Development (WBCSD) and is thought to be the biggest ESG policy and regulations database.
Fenergo’s Clarke said that in addition to the Corporate Sustainability Reporting Directive (CSRD), the Sustainable Finance Disclosure Regulation (SFDR) and a recent update to the Markets in Financial Instruments Directive (MiFID II) and ESG Pillar 3 disclosures, issued by the European Commission, are directly impacting banks. Measures in other jurisdictions are also forcing lenders to redraw their processes.
Banks will also be expected to meet new requirements under updates to the EU Taxonomy, which come into force in January, and larger lenders will be subject to UK disclosure rules that will be updated next June. Outside Europe, the US and Australia are also preparing new sustainability disclosure regulations that will have an impact on banks.
A recent webinar poll by Fenergo found that 10 per cent of financial institutions that responded said they were filly prepared to meet their ESG obligations, half were somewhat prepared and 40 per cent were poorly prepared. A lack of formal data standards and the difficulty in adapting to a rapidly changing regulatory landscape were cited as the main reasons for respondents’ not having their systems in order.
Leaders, Laggards
While all banks are in the process of getting their systems in order, Clarke said there was a clear distinction between those that are engaging more fully with the process and those that have been slow to respond.
“There is no obvious pattern as to which type of bank is transforming the fastest and which needs to accelerate,” she said. Outside of geographies, “it’s all down to individual business models.
“If a bank has a large portfolio invested in certain industries or geographies, they may be more sensitive to the impact of these changes. The commercial incentive is important too – for example banks with a large exposure to the oil and gas sector will have to go faster because all their business is highly impacted by the classification” under the EU Taxonomy and SFDR.
“What you can say is that the banks that have a net-zero policy in place are the ones who are taking this most seriously and accelerating fastest,” she added.
At an A-Team webinar that took a half-year health check of financial institutions’ preparations for ESG regulations experts said that the speed of change within ESG regulations had developed into a new pain point for banks. Net-zero deadlines, which are mostly due in 2030, were also adding pressure, the webinar’s attendants said.
Since then, signs that there could be some movement in those deadlines have emerged.
Recent comments from UK politicians indicate that there is a groundswell of support for relaxing some deadlines that will contribute to a carbon-free future. The abolition of new sales of petrol and diesel cars by 2030 is top of their hit list. And in France, President Emmanuel Macron has called for a “European regulatory pause”.
Systems Check
Fenergo offers SaaS-based solutions to help financial institutions manage their compliance data and streamline processes. Even so, it recommends that laggard banks think carefully about their systems before making far-reaching changes to their operations to beef up their compliance systems.
Many banks can run some of their ESG operations through the same client lifecycle systems they have in place for know your customer compliance. That would apply especially to the assessments of borrowers.
Beyond that, Clarke said the trailing banks must examined the reporting standards that most apply to them so that they know what data sets to get in place. That will be of greater importance in 2025 when the first disclosures under EU’s Corporate Sustainability Reporting Directive (CSRD) are made. That’s expected to bring a glut of new ESG data covering about 50,000 companies.
“ESG is at the stage that we were maybe 50 years ago, when we started to look at what it meant to fight financial crime,” Clarke said. “It has taken a long time for data standardisation and processes to be put in place and to understand what information you need to collect.
“From my perspective ESG is just at the start of the journey but banks have to accelerate their change processes because the 2030 net-zero objective has been set in stone.”
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