Sustainability has emerged as one of the most pressing issues of our time and ESG is no longer just a nice-to-have. Nearly 90% finance executives surveyed in Hong Kong and Singapore by Finastra think it’s important for the financial services and banking sector to support ESG initiatives, while PwC, found that 65% of APAC institutional investors plan to increase allocations to ESG products over the next two years.
With this momentum, there is a strong opportunity for the world’s development banks to promote sustainability by financing projects and encouraging private funding in support of climate-related initiatives. However, with a lack of access to a global, unified framework and real-time data, challenges remain.
In search of a common ESG framework
Despite the growth in ESG-related products, there is still inconsistency in ESG reporting standards. For instance, the Global Reporting Initiative (GRI) provides comprehensive guidelines for identifying ESG risks, while the Value Reporting Foundation (VRF) sets out standards for determining enterprise value.
Similarly, different criteria have been used by all the major market data providers to develop their independent ESG ratings.
There are also regional differences to consider. In China, regulators and investors are the primary arbiters of standards and policy, and most experts agree that formal government action is not likely anytime soon.
In the US, a proposed established set of guidelines was announced in March 2022 by the SEC, but this was pushed back seven months later with no new deadline established.
In Europe, the European Financial Reporting Advisory Group (EFRAG)’s proposed Corporate Sustainability Reporting Directive (CSRD) includes an advanced and comprehensive set of guidelines, and the information used to validate compliance must be vetted by third parties.
The myriad differences in global rating methodologies and reporting frameworks can result in unfair advantages. A company operating in the US, which has a less strict regime, might have a higher ESG rating than a similar company operating in a stricter regime, such as Europe.
It can also be hard for banks to accurately assess risk due to global supply chains. All this means there is a lot of attention on the International Sustainability Standards Board (ISSB), which aims to develop a comprehensive set of sustainability criteria designed to be compatible with jurisdiction specific standards.
The need for forward-looking data
As well as common standards, banks also require stronger models for assessing risk. Traditional models rely on historical data to make future projections, but this is unreliable and banks instead need forward-looking data and models to predict future climate impacts and accurately assess risk.
For development banks, factors such as legacy systems, lack of staff training and resources can make it difficult to access and report on a deeper level of data in a timely manner, such as for scope 3 GHG emissions.
Using data and reporting to make a meaningful change is another challenge. EY indicates that less than 30% of all firms are referencing climate-related matters in their financial statements.
If there is no clear correlation drawn between climate-related impacts and financial outcomes, organisations lack the insight to take positive action and mitigate financial risks.
Development banks turn to technology
The difficulty utilising data effectively, along with the absence of clear and consistent metrics for evaluating climate-related impacts, are leading development banks to improve ESG reporting and reduce financial risks through technology.
There are in fact many fintech solutions that automate the collection of data – from the amount of fuel used, to products purchased, to employee travel – that can be integrated right into banking workflows, with data then fed into the bank’s calculation engine. Others enable the importing of information directly from internal ERP systems to assess companies based on a variety of data points.
With APIs and open platforms, development banks are establishing open risk management platforms and connecting products. APIs offer close-to plug and play functionality, enabling simple integration with core ERP systems.
After integrating third-party solutions into the standard risk framework, institutions can utilise climate-related scenarios and existing banking book optimisation models to guide them towards achieving a net-zero portfolio goal.
Selecting the appropriate platform partner can facilitate seamless and prompt integration. Finastra has decades of experience and the broadest selection of fintech solutions in the market.
One solution that is particularly well-placed to help development banks is banking technology software provider Finastra’s Summit, an award-winning solution for the over-the-counter (OTC) derivatives market.
Summit is built to meet the unique needs of multilateral development banks with additional interconnected services to optimally raise debt and manage risk.
It allows development banks to raise funding on the market, including structured notes; hedge the risk on funding and loan books; and manage investment portfolios of excess cash.
Given the escalating ESG financial risks and the increasing requirement for reporting in various regions, both development banks and global banks need a range of tools to gather data and assess impact.
With today’s technology, development banks can more accurately identify and manage risks and opportunities, enabling them to drive meaningful environmental change.
Read more on ESG risk and reporting in Finastra’s whitepaper here.
