ESG Data in Banking: Mastering Challenges and Exploiting Opportunities
Data demand is everywhere
Strategy: Banking has never been more focused on the development and availability of Environmental, Social and Governance (ESG) data. Whereas a decade ago, for example, generic corporate ratings were sufficient in asset management, ESG factors are now deeply integrated into the business and risk strategy of banks and play a crucial role in a wide range of business lines.
Products: Sustainability has also massively changed the demand of bank clients. For example, the value of green bond issuances grew by around 75% year-on-year in 2021 to over $500 billion, and the total market for sustainable investments grew by almost 55% between 2016 and 2020 to a total of $35 trillion in value, while the market for conventional investments grew by only 20% over the same period.[1] [2]
Reporting: Regulatory authorities and supranational organizations started to address the issue of sustainability several years ago and are now increasingly tightening their requirements for banks in form of directives such as the EU Taxonomy or the Corporate Sustainability Reporting Directive (CSRD).
The data supply side is overwhelming
The immense, specializing demand for ESG data has also led to the rapid rise of the market for ESG data providers. Today, more than 100 ESG data suppliers can be counted and classified within 3 different categories: Market data suppliers, ESG data suppliers and ESG niche data suppliers. Market data suppliers include companies such as MSCI or S&P Global, which collect and provide all kinds of company data. ESG data suppliers such as Sustainalytics or Arabesque, on the other hand, specialize in offering various ESG data, analyses, or ratings. In addition, there are ESG niche data and tool providers that focus on specific regulatory requirements, such as Celsia and Greenomy which focus on the EU Taxonomy, as well as non-profit organizations such as the 2 Degrees Investing Initiative, which provides a free tool for assessing the alignment of financial portfolios with the Paris Climate Agreement.
The extensive offering by ESG data providers could lead to the conclusion that all conceivable data is simply available. However, this conclusion is wrong. The challenge in dealing with ESG data is best illustrated by the three dimensions of data availability, data comparability and data reliability.
1) Data availability
The vast majority of companies (74%) use ESG rating providers to source ESG data.[3] To meet the entire demand, it is usually necessary to combine data of multiple providers, as individual providers are not able to fully cover bank’s customer portfolios. Large, business-diversified financial services use on average two to five different providers, leading up to ten data providers in some cases. Consequently, the costs go through the roof.
From a bank’s point of view, the search for a data provider with ESG data matching to the own client portfolio can nevertheless turn out to be the famous search for a needle in a haystack. Asset managers with Western-focused equity and bond allocations still face a comparatively manageable challenge in obtaining sufficient and granular ESG information to manage their portfolios, as large companies do publish relevant ESG data (albeit through a variety of different reports and sources). By contrast, commercial banks with a strong positioning in the retail business will generally struggle to find the right data provider, as no data provider covers a wide range of non-listed companies and SMEs. Nor this is really possible, as SMEs do not publish sustainability reports and are unlikely to do so in the future. The resulting magnitude of the bank’s challenge becomes apparent when realizing that over 99.4% and thus more than 2.5 million German companies are SMEs.[4]
2) Data comparability
Combining information from different ESG data and rating providers is not recommended. The comparability between ratings from different providers is usually not given, as each provider defines relevant ESG criteria and their weightings differently - i.e. different methodologies are applied. This can result in significant rating discrepancies with respect to one and the same company. For example, Tesla’s ESG performance is given an A rating by MSCI, but a very poor rating by S&P Global and was even removed from their S&P 500 ESG Index in 2021.[5] [6]
3) Data quality
In addition to the non-comparability of ratings, there are also concerns about the reliability of the available ESG data. Often, ESG data is fragmentary, unaudited and of poor quality, which leaves at least a questionable feeling when ratings and business decisions are derived from it.[7]
Business potentials are hardly exploited, regulatory requirements are difficult to be met
The previously described complications represent immense stumbling blocks for banks which frequently turn out to be showstopper when it comes to self-reliant and exhaustive realization of envisioned business models. In addition, banks can often not meet regulatory requirements, as required granular ESG information e.g., to align with EU’s Do No Significant Harm (DNHS) and Technical Screening Criteria (TSC) of the EU Taxonomy are not available in many cases.[8] In a joint exercise on the application of the EU Taxonomy to core banking products in 2021, the European Banking Federation and the United Nations Environment Pro-gramme Finance Initiative found that a strict alignment approach was not possible in any of the cases examined.[9]
For multinational banks, this is compounded by the fact that different ESG taxonomies apply depending on the region of the world, with different understandings and definitions of sustainability. Besides the well-known taxonomies such as the EU Taxonomy, the Common Ground Taxonomy or the Asean Taxonomy, we count a total of around 30 locally and nationally applicable sustainability taxonomies.[10] [11] This diversity leads to the vague predictability of which criteria and data will be decisive in the future from the banks' perspective.
It always seems impossible until it’s done
Banks need to find a solution to deal with the previously explained situation of error-prone, inaccessible, and ill-defined ESG data. Subsequently, two potential approaches to action on part of banks are discussed, the approach of self-contained data collection as well as the approach of corporate ESG certificate consumption.
Along with the efforts undertaken by banks, international regulators could also help improve the situation by introducing common and consistent global disclosure standards and a global ESG taxonomy with uniform sustainability definitions, metrics, labels, and methodological standards.
Mastering data collection to master the situation
The fundamental problem that corporate ESG data is not sufficiently available on the market, especially for SMEs, will not be solved in the near future and certainly not by itself. Banks can and should therefore take the initiative and start to consolidate their clients’ sustainability data.
A first step in this direction could be to utilize already existing ESG-related client data and organize it in a structured manner. However, to create a meaningful ESG database, new processes must be developed and implemented to acquire all the required client information. For guidance in defining relevant ESG criteria & KPIs, established ESG standard reporting frameworks, such as the Global Reporting Initiative Framework, should be applied.[12] Furthermore, data could be collected using questionnaires. For this purpose, banks should define industry-specific KPIs and differentiate the scope of questionnaires, e.g., in three dimensions - depending on nature and scope of a client’s business.
The key advantage of in-house data collection is access to granular data obtained directly from the client. This can then be used for multiple purposes, such as creating industry benchmarks and peer group analyses, as well as deriving further individual KPIs. The collection and application also leads to a deep embedding of ESG awareness within the responsible departments and contributes building ESG knowledge within the company.
Usage of external standards: ESG certificates
A promising approach to ESG performance assessment is the utilization of ESG certificates. Such certifications are available for many industries, topics of investigation, and asset types. In addition to special certificates (dealing e.g., with climate protection, diversity, environmental, labor standards, material, social or waste and water management aspects) there are industry-specific seals (e.g., in tourism or construction industry) as well as certificates that presuppose the entire assessment of a firm (e.g., B Corp, EcoVadis) or the assessment of a company’s management system (e.g., EMAS, ZNU). Within all four categories, certifications can include requirements regarding all three ESG pillars, or they can focus on requirements regarding only one or two ESG pillars.
Below is an exemplary overview of four types of ESG certificates, each with two examples and the labelling of which E, S or G aspects are covered by the respective certificate. In addition, brief overviews and the key benefits of six shown certificates are appended at the end of the article.
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Companies could systematically acquire certificates to demonstrate their sustainability performance and deposit them with banks. For banks, this would result in a simplified process, as all collection processes would be outsourced to the certificate issuers. Likewise, banks would no longer need to be concerned about the reliability and integrity of ESG data, as it would be guaranteed by the certificate issuers' rigorous assessment procedures. Regulatory reporting requirements as well as obligations to provide evidence for audits could then, for example, largely be met by referencing to the standardized data points of the certificates.
However, from banks’ perspective, the main drawback of the ESG certification solution is that access to granular ESG data would once again not be possible. Therefore, the solution approach via ESG certificates should not be seen as a fully exhaustive solution, but rather as a reasonable, quick-to-implement and cost-effective complement to in-house data collection.
It always seems impossible until It’s done!
Unfortunately, there is no default solution for banks on how to obtain the so desired ESG data. It is more a case of designing, developing, implementing, and maintaining solutions that are unique and tailored to the individual needs. As Capgemini combines business and technical expertise under its roof, we design fit-for-purpose solutions with and for our clients to successfully master ESG data projects. Reach out to us to get the future you want.
Brief description and key benefits of exemplary ESG certifications
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[6] S&P Dumps Tesla From Its ESG Index. Why Sustainable Ratings Are a Problem. | Barron's (barrons.com)
[8] Ensuring-the-Usability-of-the-EU-Taxonomy-and-Ensuring-the-Usability-of-the-EU-Taxonomy.pdf (icmagroup.org)
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