ESG technology for banks: Buy, build or both?

A flexible strategy for ESG success

The right ESG technology strategy varies by institutions. While the decision itself may seem binary–buy or build–banks actually have more flexibility than initially apparent.

As regulatory deadlines loom and ESG becomes a revenue driver, the pressure is on to integrate robust ESG data solutions. Choosing whether to buy, build or combine both approaches is a strategic and critical decision for banks. This article explores how banks can navigate ESG technology choices to drive sustainable growth and compliance.

Sustainable is not always simple

Why scaling ESG is hard

Despite the huge business potential within the ESG sector, banks struggle to scale their initiatives.The main challenges include:

• High complexity and cost of ESG data
• Fragmented data sources and systems
• Rapidly evolving regulations
• Limited robust ESG solutions

Manual processes and scattered, incomplete data sets exacerbate this complexity, making it difficult to build a strong ESG foundation.

From cost center to profit driver

Financial institutions need a mindset shift. ESG should no longer be seen as a cost center. With the right technology, ESG becomes a strategic asset and a vital profit center instead. Replacing traditional, Excel-based processes with integrated, automated systems using advanced technology can streamline reporting and position banks as leaders in sustainable finance.

ESG transformation roadmap 

The ESG journey follows a structured approach much like Maslow’s hierarchy:

• At the bottom, it starts with data and regulation. This means ensuring compliance and effectively managing risk through end-to-end, integrated ESG data architecture that automates reporting and reduces manual interventions.
• It then progresses to ESG strategy/portfolio management. Here, the goal is to steer the financial institutions towards net zero and sustainable finance targets while managing climate risks.
• Ultimately, it advances to business opportunities, which involves integrating ESG into core operations to drive profitability.

To enable the transition from cost to profit centers, banks need ESG technology that fits current operations and adapts to future changes.

This adherence to our SAP Fioneer motto, “do it once, but do it right,” is crucial in choosing solutions that offer long-term viability over quick fixes.

The best ESG solutions share a few key traits:

• Flexibility to evolve with the market and continuous regulatory changes
• Integration with existing infrastructure for IT security
• Scalability to support long-term growth

Buy or build? A strategic decision

The strategic decision between buying third-party solutions and building in-house platforms is pivotal. Each option offers distinct advantages and challenges that can shape an institutions ESG trajectory.

By following our guiding principle of “do it once, but do it right,” banks can avoid costly reiterations and select solutions that are sustainable and future-proof.

We explore both the buy and build options in more detail below, before diving into our own model to help institutions align their ESG strategy with operational goals.

Buying Third-Party Solutions  

Advantages:

• Regulatory Alignment: Third-party solutions often come pre-configured to meet existing ESG regulations, easing compliance burdens.
• Rapid Deployment: The allure of third-party solutions lies in their quick implementation. Organizations can accelerate their ESG initiatives by immediately gaining access to new technology.
• Cost Efficiency: Choosing third-party platforms usually offers lower upfront costs, leading to a lower Total Cost of Ownership (TCO). This approach provides predictable expenses and long-term cost savings, streamlining budgeting and reducing maintenance burdens. 
• Technological Advancements: Without the need for in-house development, organizations can still tap into the latest technological innovations, staying ahead in the ESG arena. 
• Scalability: Designed by seasoned vendors, these solutions easily grow with your organization, eliminating the need for constant platform reinvestment. 
• Reliable Support: Vendors offer ongoing support and updates, ensuring that the ESG management system evolves alongside technological and regulatory changes.

Challenges:  

• Customization Limits: While adaptable, third-party solutions may not meet every niche requirement or fit into unique organizational processes seamlessly. 
• Vendor Dependence: Relying on vendors for critical updates and support might limit an organization’s flexibility in the long term. 
• Integration Efforts: Marrying third-party platforms with existing systems can be a complex venture, demanding additional resources. 
• Regulations are still in flux: With regulations still being finalized such as banking-specific guidance instead of cross-sector guidance, a software purchase might feel premature. 

Building In-House Platforms  

Advantages:

• Tailored Customization: Building internally offers unmatched customization. Solutions can be meticulously designed to align with specific organizational needs and strategies. 
• Complete Control: Organizations enjoy full authority over the development, deployment, and evolution of their platforms, allowing for agile responses to shifts in strategy or the market. 
• Seamless Integration: In-house platforms can be crafted to integrate flawlessly with current systems, ensuring operational harmony. 

 Challenges:  

• Substantial Investment: The initial outlay of resources, time, and talent for in-house development is significant, presenting a steep entry barrier. 
• Maintenance Responsibility: The onus of ongoing platform maintenance and updates falls entirely on the organization, requiring a sustained commitment. 
• Demanding Resource Allocation: A dedicated development team is a must, potentially diverting focus and resources from other key initiatives. 
• Obsolescence Risk: The fast-paced nature of technology and regulation means in-house solutions may quickly become outdated. This necessitates continuous investment to remain relevant.

Introducing the Taker, Shaper, Maker Model

Making buy vs. build decisions isn’t always binary. ESG use cases vary widely. Typically, a use case adhering to established frameworks and regulatory demands will benefit from purchasing third-party solutions. However, more strategic and distinct needs necessitate tailored in-house development.

In ESG for banking, we identified 20+ use cases ranging from regulatory reporting (generally accepted frameworks) to establishing green supply chain finance programs (individual).

However, the view may not be so black and white. Companies can also choose to shape their own ESG solution by combining third-party frameworks and their own technology. 

This is what we call the Taker, Shaper, Maker approach. This is our proposed flexible framework for implementing ESG technology:

• Taker: Adopt third-party solutions for speed and compliance
• Shaper: Customize and co-develop ESG tools using external frameworks and internal capabilities
• Maker: Build fully bespoke platforms for highly specialized needs

Considering the rapidly evolving ESG landscape, most institutions prefer to adopt the “Taker” and/or “Shaper” models. This strategy allows institutions to benefit from third-party solutions for their speed and efficiency and embraces the flexibility and innovation potential inherent in the “Shaper” model. 

The Taker-model

The Taker-model is ideal for organizations that need to meet ESG requirements and cost-effectively. It suits institutions working with restrictive budgets or those that already have some ESG solutions in place and are looking to supplement these tools to meet specific regulatory needs. By adopting off-the-shelf ESG technology solutions, banks can efficiently transition from manual, Excel-based processes to more sophisticated systems that offer better data visualization and audit trails, thus ticking the regulatory compliance box effectively and affordably.

The Taker model offers efficiency and cost-effectiveness. However it may present drawbacks such as less flexibility to adapt to unique organizational needs and potential concerns regarding data security. This is because reliance on third-party solutions can sometimes limit control over sensitive ESG information. 

The Shaper model

 Adopting the ‘Shaper’ model, our SAP Fioneer ESG KPI Solution lays a robust foundation for ESG data management. This model excels in customization and co-innovation, closely aligning with our clients’ unique sustainability goals. This partnership-driven model facilitates a hands-on approach to developing ESG solutions that are not only tailored to an organization’s specific needs but also integrated with global sustainability best practices. 

Shaper in practice 

Using this methodology, we have successfully guided numerous clients through their sustainability journeys. For instance, we have enabled banks to enhance their ESG reporting by not only focusing on the seven asset classes recommended by the Partnership for Carbon Accounting Financials (PCAF) but also by venturing into new sectors. This includes supporting a mid-size German bank with its shipping portfolio and assisting a global agricultural bank in refining their reporting and steering their portfolio strategy. These banks have leveraged self-calculated emission factors and addressed the intricacies of structured finance within their portfolios. This comprehensive approach highlights our dedication to assisting clients in navigating the complexities of ESG reporting. Thus, we ensure they remain at the forefront of a dynamic regulatory landscape and contribute significantly to global sustainability objectives.  

The Maker-model 

In the realm of ESG technology for banks, the ‘Maker’ model is reserved for highly specialized scenarios where unique, strategic business needs cannot be met through existing solutions. This model involves creating bespoke platforms. These platforms, while offering unparalleled customization and alignment with specific organizational goals, comes with substantial challenges. These include significant investments in time, expertise, and financial resources. Building from the ground up is a substantial commitment that should be undertaken only when the proprietary advantages clearly outweigh the considerable costs. And when other models like ‘Taker’ and ‘Shaper’ cannot adequately address the needs. In most cases, leveraging and customizing existing technologies through the ‘Shaper’ model will provide the strategic agility needed without the prohibitive costs of the ‘Maker’ model.

Final Thoughts: Strategic ESG decisions for long-term impact 

Reflecting on the lessons from digital transformation in the banking sector, one thing is clear. Navigating ESG data management requires careful strategic planning and collaboration. As organizations evaluate their goals, resources, and the broader sustainability landscape, they must make informed decisions to ‘do it once but do it right.’ This ensures that the role they choose — Taker, Shaper, or Maker — leads to durable and scalable solutions that align with their long-term objectives. 

While the decision may seem binary — buy or build — the Shaper approach demonstrates that combining elements of both strategies can lead to rapid implementation, enhanced flexibility, and significant growth through ESG.

Empowering ESG with SAP Fioneer

Agile solutions like SAP Fioneer’s ESG KPI Engine, are designed to support this flexibility. They help organizations overcome current challenges like data fragmentation and regulatory uncertainty while unlocking new opportunities for sustainable growth.

By choosing the right model and investing in the right tools, financial institutions can ensure their ESG efforts are not only compliant but also transformative.