- A bank’s entire data process is impacted by quantitative & standardized reporting, from product creation and risk strategy to credit applications and customer onboarding, and collecting the necessary information is complex and time-consuming. Meanwhile, once data is gathered, it must integrate easily into the current management system and customer review processes.
- In June 2023, the European Commission proposed ESG rating activities legislation to improve the “reliability, comparability and transparency” of the market, this could be a worthy consideration.
- Underpinning the regime would be powers to enforce penalty fines – up to 10% of the annual net turnover of the provider. A draft report was published at the start of October; the vote is scheduled for November 28th, 2023.
Environmental, social, and governance (ESG) is an increasingly important part of the financial services landscape, including the regulatory arena. With that in mind, there are efforts to scrutinize banks’ ESG claims more aggressively, via new and updated legislation and improved enforcement. That raises many questions about data collection, its granularity and taxonomy, and how banks can implement the relevant regulations effectively moving forward. Below, we explore green regulatory reporting and how financial institutions can place themselves in the strongest position as the situation develops, including leveraging data visualization tools.
European ESG regulations for regulatory reporting
Historically, ESG reporting fell under the non-financial umbrella – subjective and qualitative. However, the roles of the European Central Bank (ECB) and the European Banking Authority (EBA) have expanded over recent years. As a result, a swathe of intrinsically linked ESG texts has come into effect, standardizing reporting, with more in the pipeline.
Arming financial institutions with valuable information and giving investors the means to compare sustainability performance, they include, but aren’t limited to:
- Basel III, Pillar 3: Aims to “promote market discipline via disclosure requirements for banks”. This continues to develop, covering ESG factors like climate-related risks, exposure to green assets, and making sustainability part of risk management.
- Non-Financial Reporting Directive (NFRD): Requires in-scope businesses to publish a report on their ESG performance, encouraging them to develop a responsible approach. It applies to “certain large companies and qualifying partnerships with more than 500 employees”, including: Listed corporations, banks, insurance firms.
- Capital Requirements Regulation 2 (CRR 2): Significantly amended the CRR, including a firm focus on ESG.
- Sustainable Finance Disclosure Regulation (SFDR): This transparency framework defines how financial market players disclose sustainability data, while helping investors make informed choices.
- Taxonomy for sustainable activities: European Union (EU)-wide classification system and the cornerstone of the sustainable finance framework. It outlines criteria for economic activities that align with the net zero by 2050 trajectory and broader environmental goals.
- Corporate Sustainability Reporting Directive (CSRD): The latest version strengthens the rules regarding ESG-related information companies must disclose. A wider set of large businesses plus listed small- and medium-sized enterprises will be required to report on sustainability.
- European Sustainability Reporting Standards (ESRS): Firms subject to CSRD must report according to ESRS, spanning “the full range of ESG issues, including climate change, biodiversity, and human rights”.
- Implementing Technical Standards (ITS): Aiming to ensure “uniform reporting requirements” for ESG-related Pillar 3 disclosures, amendments are under consultation, reflecting updates to other regulations. The EBA’s final draft put forward tables for qualitative disclosures and 10 quantitative templates. The latter includes:
- Climate change transition risk.
- Climate change physical risk.
- Mitigating actions like Green Asset Ratio taxonomy-aligned activities.
Compliance & customer knowledge
A bank’s entire data process is impacted by quantitative and standardized reporting, from product creation and risk strategy to credit applications and customer onboarding, and collecting the necessary information is complex and time-consuming. Meanwhile, once data is gathered, it must integrate easily into the current management system and customer review processes.
For example, Pillar 3 templates include banks indirectly financing projects that harm the environment and real estate loans that pay for non-energy-efficient buildings. In both cases, the disclosure calculation is complicated.
Agencies like Sustainalytics, MSCI, and EcoVadis collect ESG data to rate businesses, but there’s no universally accepted framework, results differ widely, and they generally retain ownership of the data.
Instead of banks going down the agency route or introducing a quick fix by adapting current processes, we advocate an integrated, cross-functional approach involving internal data collection and analysis. By doing that, myriad rewards await them and their customers, including:
- Regulatory compliance.
- Reduced costs.
- Better understanding of customers’ needs.
- Customer loyalty and churn prevention.
- Personalized client advice.
- Optimization of ESG risk exposure.
- Proposal of adapted/new products to suit requirements.
Platform model
Another way forward is combining agency ratings with internally collected data in a platform. Given that in June 2023, the European Commission proposed ESG rating activities legislation to improve the “reliability, comparability and transparency” of the market, this could be a worthy consideration.
Underpinning the regime would be powers to enforce penalty fines – up to 10% of the annual net turnover of the provider. A draft report was published at the start of October; the vote is scheduled for November 28th, 2023.
Sopra Banking Software’s commitments
When it comes to ESG, we strive for a best-in-class performance that goes beyond meeting regulatory requirements. With that in mind, our forward-thinking developers created a user-friendly data visualization tool prototype that leverages charts, dashboards, simulations, and key performance indicators.
Going way beyond Excel’s capabilities to explore and analyze data from different perspectives, the technology behind the interface is Metabase – top-ranked, open-source software. And the future is set to bring even more possibilities, when artificial intelligence and machine learning are incorporated.
For more on this next-generation solution, watch our data visualization tool demo.
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