In the last few years, banks have significantly increased their commitments to net zero. The Net Zero Banking Alliance (NZBA) membership has risen from 43 banks at its launch in April 2021 to 144 banks by the end of July 2024. This goes in tandem with the steps their business customers have taken to measure and report emissions, with the Corporate Sustainability Reporting Directive (CSRD) requiring nearly 50,000 companies to report on their emissions by January 2025. Meanwhile, Eurozone banks have already started applying climate risk premiums to loans, according to research from the European Central Bank.

These are just a few preliminary steps in a long and challenging transition. While many companies have set net zero targets, little concrete activity and potential greenwashing has led to a deficit of credibility. Making commitments and creating transparency won’t be enough – banks need to proactively finance companies contributing to climate mitigation, while ensuring that their customers in high-emitting industries are also making significant steps to reduce their emissions.

With current EU emission reduction projected at 48% by 2030, still seven points short of the 55% reduction commitment, Financial Service Institutions (FSIs) will play a crucial part in helping the private sector fill that gap by managing their book towards net zero alignment.

In order to reach that goal, FSIs need to be implementing three initiatives: baseline emissions measurement, net zero target setting & tracking, and day to day decision-making.

To get a real sense of where we’re going, we first need to understand where we’ve come from, and where we stand today. Developing an effective net zero plan requires accurate and complete measurement of existing and historic emissions. The Partnership for Carbon Accounting Financials (PCAF) provides a widely accepted, standardized approach for banks to assess and report their financed emissions, and the CSRD’s push for thorough European emission reporting will also make this process easier, at the same time as it makes it necessary.

It’s unlikely, however, that banks can get the full picture of their emissions from any single source. This data will come from both top-down estimates and bottom-up reported emissions data, likely via a mixture of customer inputs alongside external data providers, such as Bloomberg, MSCI, and ISS ESG.

The complexity increases when trying to quantify and aggregate this data across a whole portfolio, potentially involving millions of customers and transactions. Many of these data points will be opaque and non-standardized, making the process slow and expensive without the proper tools. A robust, fully historicized, and auditable calculation engine is essential to efficiently identify high emitters within portfolios and streamline the journey towards net zero.

Advanced data management systems become particularly necessary when collaborating across different industries – with customers, data providers, and other banks. Collaboration will be key to sorting out the disparate climate data landscape, including current challenges of data siloed by region, a lack of standardization per industry, or data geared only to certain use cases. By utilizing and integrating the most robust data tools available to collate such a wide swathe of data, FSIs will be able to achieve the level of detailed and accurate emissions reporting that the CSRD demands while making sense of emissions in their own portfolio.

With the historic emissions accounted for, FSIs will be able to start forming a forward-looking perspective on how to reach net zero alignment by the year 2050. The NZBA requires banks to set sector-level targets starting with high-emitting industries, including agriculture, coal, commercial real estate, residential real estate, iron and steel, oil and gas, and transport. In June this year, EBA-regulated banks for the first time had to disclose their net zero alignment against 2030 interim pathways, in tandem with increasingly mandatory transition planning requirements under the CSRD.

However, as the CSRD imposes stringent reporting requirements, the risk of greenwashing becomes more pronounced. RepRisk found that the banking and financial services sectors saw a 70% increase in the number of climate-related greenwashing incidents from 2022 to 2023. A commitment to data that is accurate, thorough, and up-to-date will be one of most important ways to counter such greenwashing. Banks should seek limited and reasonable assurance on emissions data from their customers, which offers a third-party verification of the data. Such accreditation, like the CSRD or the ISSB, helps to ensure that the reported data is accurate and credible, thereby enhancing transparency and trust.

In addition, continuous measuring of client emissions will be needed to gauge whether real progress is being made. Top-down industry estimates (PCAF Data Quality scores of 4 and 5) will not be enough. Instead, the core of this data will come directly from customers. Not only must banks hold their clients accountable for reducing their emissions, they should also expect increasingly thorough emissions data from them.

A six step approach to ESG data orchestration allows for the continual capturing of the evolving data, adding another layer of complexity to the process.

FSIs need an engine built to deal with that complexity in order to be able to dynamically monitor their progress. Transitioning away from static spreadsheets to an automated data platform will help them track changes and new sources in real time. Without it, the data might quickly become outdated, leading to unrealistic or unmet net zero targets. 

Equipped with the correct data and the digital tools to make sense of it, FSIs can start to enact their new role in this changing world: supporting clients to transform their industries.

We’re still far from net zero being a workable reality. The World Resources Institute, tracking the portfolio emissions from banks across key sectors between 2019-2022, found that most banks have not aligned their emissions reduction efforts or presented a clear pathway to reach net zero in high-polluting industries.

In order to continually prevent greenwashing, climate and transition planning will need to be core to overall financial strategy – part of the day-to-day conversations with clients. In addition, good emissions data will include not just the historic emissions, but also the forward-looking trajectory data on emissions in order to ensure that KPIs are being met.

Advising customers and building trust has always been a core part of every banker’s job – advising those customers on how to transform their businesses into climate-conscious ones adds a new dimension to this.

Rather than playing the role of climate policeman to organizations from historically high-emitting industries, FSIs can demonstrate how financial sustainability and ecological sustainability can go hand-in-hand, helping their customers transform their business models to still be profitable in the future.

Achieving this balance will be challenging and nearly impossible without accurate data and the infrastructure to analyze it effectively. By fully integrating within the FSI’s architecture, SAP Fioneer’s ESG KPI Engine provides auditable standard calculations across the bank’s entire portfolio, integrating both historical and forward- looking emissions data.

Fully historicized and auditable, the engine identifies assets, counterparties, and portfolios that are not aligned with the Paris Agreement early on. This allows FSIs to unlock new business opportunities and enhance the resilience of their customer portfolios, providing a clear, dynamic view for banks as they guide their clients in transitioning to a more sustainable future.

To find out more about our ESG KPI Engine, contact one of our experts.