The pressure on financial institutions (FSIs) to comply with the expanding range of Environmental, Social, and Governance is growing – requiring a new level of data and insight, especially for Scope 3 Financed Emissions. However, many lack the systems to effectively assess ESG KPIs across their portfolio, relying on manual analysis, spreadsheets and siloed data. The issue is primarily one of process and infrastructure. While 50% of FSIs say that setting achievable ESG goals and reporting compliance are priorities, 45% say they lack the tech solutions necessary to achieve their ambitions.
As ESG becomes a core reporting area for FSIs, there is a golden opportunity to go beyond simple regulatory requirements and use new information to drive impactful business choices that align with global climate change goals. But this requires a new approach to the way FSIs source, structure and analyze their data. 

1. The changing ESG landscape

The ESG data challenge is coming up fast. Since 2018, we have seen over 30 new regulatory guidelines, transparency exercises, and impact studies issued globally, each of which adds to the body of guidelines that FSIs must be aware of. The European Union, for example, has already adopted a package of measures including the Sustainable Finance Disclosure Regulation, EU Taxonomy, or Insurance Distribution Directive. It is highly likely that further regulation will follow and that existing ones will become stricter, with EBA Guidelines and further ECB Climate Stress Tests expected in the coming years. With each new directive come additional obligations for FSIs, which need to measure and prove their ESG performance, while also aligning their business with “green” KPIs to minimize their exposure to climate risk. In particular, financed and insurance-related emissions are under increasing scrutiny, pushing FSI to source, report and address in-depth emissions data across their portfolio. 

2. The data challenge of ESG regulation

While the exact scope of reporting is ambiguous for some directives, and some full measures not coming into force until 2024, the obligations are likely to be far beyond current capabilities. Both CSRD and Pillar 3 requirements mandate the disclosure of the environmental aspects of an FSI’s activities. CSRD alone can require more than 1,000 KPIs, involving both quantitative and qualitative data that is both backward- and forward-looking. The KPIs involved can either refer to the FSIs own emissions (scopes 1 and 2) or to the value chain, such as financed emissions (scope 3), but the emphasis is usually on the latter, since financed emissions are 700 times higher than own emissions. The challenge is that they’re much harder to measure. 

New regulation will require FSIs to access huge amounts of ESG data from across their financed portfolio, which raises several major issues:

  1. Access: FSI do not always have access to the data required, requiring proxy calculations. When they do have the data, it may not be easy to source it internally, update or complete it. 
  2. Data integration: Data needs to be accessed from many different sources, including within internal systems across an FSI, directly from the loan and investment portfolio companies, from external public databases, or from data vendors and aggregators. 
  3. Cost: As the ESG burden grows, manual data sourcing and analysis will become an expensive burden for FSIs relying on legacy data structures to report on their portfolios in the face of increasing disclosure demands. 

3. From reporting to business opportunities 

The value of ESG data goes beyond simple compliance – as this becomes a core competition area, leaders in this arena will have the chance to offer innovative, customer-focused solutions that provide tangible value for internal and external stakeholders. 

Building a future-proof portfolio
As the scope of ESG regulation expands, every investment, financing and insurance decision will have to take into account the unique ESG profile of the target business, the impact this will have on returns and the role of the FSI in guiding their clients. Without the right data, this could dramatically slow down sales and reporting, but with a holistic platform in place, FSIs can make this an integral part of their product offering, including: 

  • Integrating ESG into credit decisioning and KPI-adjusted pricing to protect returns  
  • Steering portfolio activity to increase and maintain exposure with low-emission issuers and make informed decisions on high-emission issuers and help them on their Net Zero path with transition finance 
  • Anticipating and managing risks related to physical and transitional risk to mitigate financial loss from climate change 
  • Benchmarking clients based on calculated ESG performance KPIs to gauge performance at scale 

Taking a leading role in ESG transition
With improved visibility, FSIs can move from simply managing their existing exposure to making ESG a key part of their value offering for clients, becoming an trusted partner on a core issue to enhance retention, lifetime value and expansion, including:

  • Creating new product classes, for sustainable financing such as transition, green asset and social financing 
  • Offering ESG advisory to guide clients in their transition to Net-Zero and improved ESG performance 
  • Expanding refinancing options with green bond and loan placement

4. The hidden ESG opportunity

The ESG challenge is an extension of the data issues that FSIs have been facing for years – how to best source, manage and integrate a vast array of financial information from disparate sources to drive business value. The push from ESG provides a strong incentive for FSIs to change – moving from manually collecting and managing ESG data in a fragmented manner across departments to automated solutions that can improve compliance, operations and performance. 

SAP Fioneer’s ESG KPI Engine is designed to deliver a comprehensive software for FSIs, with the ability to:

  • Holistically orchestrate ESG data for the whole portfolio from a single point of control 
  • Ingest and harmonize data from both internal and various external sources 
  • Integrate data quality checks for a robust audit trail  
  • Calculate relevant KPIs, including financed emissions in a timely fashion. 

Not only does this streamline the burden of ESG compliance, but also opens up a range of new opportunities for sustainable loans and investments. 

5. Unlocking competitive advantage with ESG KPIs

As ESG moves to the fore, FSIs have the choice to follow or to lead – the reporting and compliance challenges of ESG will affect both FSIs and their clients, but with the right tools, FSIs can become a strategic partner to their portfolio clients in this seismic shift. By developing a new approach to data and process, FSIs can help guide ESG strategy for portfolio clients, provide actionable advice on investments, insurance and build value-driven relationships that deliver long term value. However, this requires not only a targeted commercial strategy, but also the right data strategy.
With tools such as SAP Fioneer’s ESG KPI Engine, FSIs can become centralized resources for ESG data collection, analysis and advisory, combining internal and external information to create holistic, actionable strategies for internal teams and external clients.

Find out more about how the right ESG data can take you beyond compliance to create sustainable competitive advantage, get in touch with our team today.

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