Third-party data sources are the largest investment financial firms are making to deliver environmental, social and governance (ESG) strategies, yet data quality remains the biggest concern when sourcing the data. This conundrum was among many ESG issues discussed during a practitioner innovation keynote delivered at A-Team Group’s recent Data Management Summit Virtual by Sarah Walker, head of data and analytics at NatWest Commercial and NatWest Markets, and Andy Ruocco, head of data and analytics – climate, at NatWest Group.
Walker kicked off the keynote, Delivering the data strategy for ESG at NatWest, saying: “People used to say that data is the new oil. Data is actually the fuel that Natwest is using to drive our corporate commitment to the climate agenda.”
The bank set its ESG strategy in early 2020, with a focus on climate change and the aim of helping people and businesses transition to a new zero carbon economy. It took a four-strand approach: getting its own house in order and becoming climate positive to meet its own ambitions; working with its oil and gas customers to ensure they have credible transition plans aligned with the 2015 Paris agreement by the end of this year; looking at responsible financing and halving the climate impact of the group’s finance activity; and engaging in partnerships.
In terms of regulatory requirements NatWest needs to meet to ensure its climate ambitions, Ruocco noted the Bank of England’s Prudential Regulation Authority’s (PRA) issue of a Supervisory Statement, SS319, which sets expectations for firms regarding their consideration of climate risk across four areas – governance arrangements, risk management, stress testing and scenario analysis, and disclosure.
Ruocco said: “SS319 requires banks to introduce climate into their risk frameworks, and that has a pretty material impact on data from a risk perspective. It means bringing new factors and new risk types into decision making in a pretty short period of time.”
The bank is working on this in parallel with the Bank of England’s stress test on climate that is due to come into play in the next few weeks. “Again, this is a pretty major shift from what we’ve historically done on stress testing, and it looks to stress our current balance sheet but looking 30 years into the future, brought back to today. So it’s a very different technique, and a different demand from a technology point of view,” said Ruocco.
He also touched on the Task Force on Climate-related Financial Disclosures (TCFD), which is expected to make climate disclosures mandatory in the next few years, although many of the main banks across the UK are already making disclosures, as well as the EU sustainable action plan and EU green taxonomy, and the UK’s commitment to a UK version of the green taxonomy. “Being able to consistently classify what activities are green, but also what activities count towards transition, is going to be absolutely critical to avoid green-washing and making sure that markets are operating in a clear and transparent way.”
An audience poll during the keynote showed 58% of respondents reporting that third-party data sources are the biggest chunk of investment in their ESG strategies. A later poll highlighted data quality as the biggest concern for firms when looking to source ESG data.
NatWest has approached these issues by developing an internal sustainable data platform that allows the bank to bring in data from a variety of sources from small government initiatives to large data vendors. While exploring and ingesting around 100 data sources, the bank is working in parallel on a cloud-to-cloud and cloud-native environment that will allow it to move raw data into its data lake pretty much instantly.
The bank is also working on cleaning up and and enhancing its internal data sets. “The climate agenda is driving a need for more granularity in terms of what our customers do and how they do it than we’ve needed in the past. So there’s a real exploration of how we can better leverage our internal datasets and better understand carbon impact.” Technology investment to support data management for climate data includes machine learning, AI and graph databases.
BCBS 239 principles
From a NatWest perspective, Walker said over 50 data requirements have been identified that will help the bank better understand its own carbon footprint, ensure compliance, and help its customers achieve their own ESG goals. She noted the importance of incorporating BCBS 239 principles into any ESG programme to ensure good definitions of data, transparency around data sourcing, and an understanding of data profiling that makes it possible to ‘stamp the quality of that data’.
Looking forward, Ruocco concluded: “I think we will see a consolidation of commercial data feeds and strong partnerships across a wider variety of firms, particularly the big tech firms in terms of capturing and calculating emissions data. I think we will also see a drive-down in terms of granularity and detail, both from the customers and in the information we have about each of those customers. Banks will need to be extremely flexible in terms of how they respond and ingest new data sources. The days where you could take 18 months to bring a feed in and get it into production are well and truly gone. Timescales you’ll be looking to work to will be weeks, sort of sprints, rather than months and years.”