In 2024 and 2025, the Corporate Sustainability Reporting Directive (CSRD) will come into force for many banks operating in the EU. For the first time, they will be legally required to include reliable and auditable sustainability data alongside financial information in their annual reports. CSRD can be considered an extension of the Non-Financial Reporting Directive (NFRD), which applies to about 11,600 companies with more than 500 employees. By comparison, CSRD will apply to about 49,000 companies that have at least two of the following characteristics: more than 250 employees, more than €40 million in turnover, and more than €20 million in total assets. CSRD also introduces a number of new concepts, such as ‘double materiality’, which means that as well as assessing their impact on society and the environment, organizations must also measure how social and environmental factors affect them.
This increased complexity raises a number of unique challenges for banks.
CSRD challenges for banks
Banks face three main challenges: determining materiality through the value chain, ensuring that materiality is auditable, and a lack of guidance specific to their needs.
- Materiality in the value chain
The first step to achieving CSRD compliance is carrying out a Double Materiality Assessment (DMA). This requires organizations to look at their entire value chain and identify which disclosure requirements are relevant to them.
For banks, the situation is complicated. Because they finance other businesses, most of their materiality lies within their portfolio companies. For example, when carrying out a DMA, a bank would need to consider the greenhouse gas (GHG) emissions and the climate-related physical risks their portfolio companies might generate, and include these findings within the report. Many KPIs require banks to drill down and perform extremely granular measurements, looking at individual customers including SMEs, loans, and collaterals.
- Auditability
As well as identifying materiality, banks must also measure it. The numbers have to be traceable, verifiable, and ultimately auditable.
This demands a high degree of granularity. For example, if a bank finances a car rental company, it may need to calculate the emissions of every vehicle that’s leased out, taking into account factors such as the model and how far it has been driven. This could mean measuring the individual emissions of each car, just to account for a single company. As an indication, Europcar has more than 200,000 vehicles in Europe.
Banks with other complex portfolio companies face a similarly huge task, made harder by the fact that most will be capturing this information for the first time. They will need to cooperate with portfolio companies to do this and put new systems in place to do the same with future companies.
- Lack of sector-specific guidance
Implementing CSRD is especially difficult for banks because the requirements have been written with corporates in mind. The European Financial Reporting Advisory Group (EFRAG) was expected to publish bank-specific standards by the end of 2024, but these have been postponed.
There is also no central source of guidance for financial institutions on how to navigate CSRD. For example, biodiversity is often seen as material, but the legislation isn’t specific about how banks should measure nature-related risks. There are some new guidelines being developed, such as the Taskforce on Nature-related Financial Disclosures (TNFD) and the Partnership for Biodiversity Accounting Financials (PBAF), but these are still in progress. As a result, banks are left guessing, which risks noncompliance.
Overcoming these challenges
As banks grapple with the reality of CSRD, many are realizing their resources won’t be sufficient to report successfully year after year. Team sizes are small and they often work with basic tools such as word processors and spreadsheets.
This is especially true given the scale of data management and cross-functional integration required. For example, key priorities for tier 1 banks include operationalizing materiality assessments, enhancing data collection, and ensuring audit-ready disclosures.
Intelligent software can go a long way to making CSRD reporting a less complicated and time-intensive process, tackling all three of the biggest challenges.
- Accurately measuring quantitative KPIs
Once banks have identified all the materiality in their value chain, the next step is to calculate their material, quantitative KPIs, such as financed emissions and physical risks. This typically involves analyzing large volumes of data from multiple sources, a task that is slow and error-prone if performed manually.
This is the perfect kind of task for software to handle – it can read huge data sets and make accurate calculations to help banks track important metrics, such as how much CO2 is being emitted across their value chain and the biggest environmental risks to their portfolio companies.
- Improved auditability through a single source of truth
One of the most difficult aspects of ensuring auditability is making sure reporting is consistent and accurate. Carbon accounting must be treated the same way as financial accounting. For example, there should be an audit log to understand changes in data and user-based rules to avoid overwriting data. Banks should also conduct scenario analyses and stress tests with their data.
Software can centralize data orchestration and storage, acting as a single source of truth. This has a cumulative benefit – reliable data is also valuable in future years when measuring trends and calculating year-on-year changes.
- Flexibility in an evolving regulatory environment
Regulation is constantly changing, so banks need to be ready to adapt. But because of a lack of sector-specific guidance, it’s difficult to know what the impact of future regulatory shifts will be for banks.
Standard software can pick up some of this burden, incorporating regulatory changes so banks don’t have to worry about them so much. For example, if CSRD required more detailed disclosures of indirect GHG emissions within a bank’s portfolio, it could automatically update its data collection templates to capture the additional information required. By comparison, banks using customized software would have to do this in-house, which is a large task that raises the risk of making errors.
It may also be useful to collaborate with other banks and industry bodies to establish benchmarks and share best practices for reporting. Existing industry groups focused on ESG reporting standards include the Partnership for Carbon Accounting Financials (PCAF) and Net-Zero Banking Alliance (NZBA).
Conclusion
CSRD reporting is a long process, involving detailed analysis, lots of uncertainty, and coordination across the business. For the many banks that will be required to begin reporting this year, time is of the essence. Materiality analysis is just the first step.
To prepare, banks must invest in training their staff and recruiting skilled ESG professionals to fill any knowledge gaps. Where experts aren’t available, software can do a lot of the work that experts would have to do manually.
SAP Fioneer is helping many of these organizations to use software to speed up the process and provide accurate and auditable data. We are building on this experience to develop best practices to help all in-scope banks.