Half of banks 'not ready' for upcoming ESG regulatory reporting

17 July 2022 Consultancy.com.au 4 min. read

Banks globally are lagging in their readiness for upcoming regulatory reporting in the ESG space, according to a new report by Avanade and the European Financial Management Association.

Consumers today are increasingly holding organisations, institutions, and industries accountable for better sustainability and climate risk management practices.

The financial services industry is no different – banks are under pressure to go beyond including Environmental, Social and Governance (ESG) goals in their mission statements. They are now expected to demonstrate transparency, create a greener portfolio, and develop a sustainability roadmap that drives lower carbon footprint.

How ready are you for mandatory regulatory initiatives around climate risk reporting

Globally, regulators are moving away from a voluntary code of conduct to mandatory requirements – creating a growing sense of urgency that banks must prepare sooner rather than later. However, while many financial institutions already have their ESG goals firmed up, the reality is, banks are not on track to meet those goals. 

The report by Avanade and the European Financial Management Association (EFMA) found that – although a majority (70%) of banks view their ESG work as having a positive impact on their market reputation and credibility, only half of those banks (53%) will be ready for regulatory reporting in the next six months.

How would you rate your organization’s progress in the ESG/sustainability area?

Furthermore, over half of the banks (57%) admit they will not hit net carbon zero operations until 2025 and only 1 in 4 have a climate risk model ready now.

Saurabh Verma, Financial Services Lead at Avanade in Australia, said: “The biggest challenge for banks in Australia is in keeping up with the pace of changes in regulations while supporting their customers on opportunities presented by ESG. There is a fair investment of time, energy and capacity that is required.”

While banks are increasingly responding to stakeholder demands around sustainability, successfully nailing this will mean banks can expect to redefine and strengthen their character and reputation for many years to come.

The research also suggests that the biggest challenge for banks in terms of climate risk analysis is data integration with almost a third of banks (32%) struggling with the lack of integration of climate risk data with their risk management framework.

Have you built any models that demonstrate the quantitative impact of climate risk scenarios on your business?

Verma added, “The opportunity is to look at innovative ways to solve sustainability challenges more effectively – such as using technology solutions, external and internal data sources, and partnerships to provide banks with the capabilities and insights they need to realise their ESG goals.”

The report suggests that banks should develop a holistic roadmap for their sustainability ambitions, in order to successfully move from strategy to execution. Key elements of this roadmap include:

  • Take a ‘Lean into green’ approach across their product portfolio to appeal to the younger demographic
  • Create robust stress testing and scenario analysis for climate risk
  • Showcase full transparency across operations
  • Use technology to capture data more effectively to generate better reporting, scenario planning and risk management.
  • Be ready to make the hard decisions on where to disinvest completely to demonstrate a clear transition program to a low-carbon investment portfolio.

According to reporting by Consultancy.uk on the same Avanade and EFMA report, 70% of banks now see their ESG work as having a positive impact on their market reputation and credibility, and attractiveness to new talent, in particular ESG-conscious millennials and generation Z.