This article is sponsored by SAP Fioneer.
Author: Maria Patschke, CEO of SAP Fioneer ESG Solutions
In an era marked by increased awareness of ESG factors, the E of this abbreviation gets most of the attention these days. And even if the direct impact banks, insurers or asset managers are having on the environment is relatively low, they are in the spotlight. Why? Because these financial institutions are financing projects and emitters of greenhouse gases (GHG). So, on top of regulating all these businesses, ending up with countless laws and regulations for the different industries, the heavy lifting of regulatory reporting was added to the responsibility of the financial institutions.
Whether they liked this decision or not, FIs in the EU have now had more than three years to prepare and start reporting on a voluntary basis. But with 2024 on our doorstep, it is time to shift into execution and comply with mandatory standards. However, the road to ESG compliance is one of high complexity, with numerous regulatory standards and ever-evolving data landscapes creating a formidable challenge for institutions.
The evolving regulatory landscape
The leading regulation in the EU is the CSRD, the Corporate Sustainability Reporting Directive, which will expand the scope of ESG reporting requirements to about 50,000 companies with significant business activity in the EU, including FIs. Alongside this, financial institutions will soon have to publish their Financed Emissions, a new KPI that measures the proportion of a financial institution’s share of GHG emissions of their loans and investments. This KPI will become mandatory for EU FIs in the financial year 2024 (to be reported in 2025).
Much of this domestic regulation is increasingly being supported by global initiatives such as International Sustainability Standards Board (ISSB), which is expected to become the global norm for sustainability reporting. In a subtle but clear indication of the shift towards unified global standards, the ISSB is also set to absorb the monitoring responsibilities of the Task Force on Climate-Related Financial Disclosures (TCFD).
But while initiatives like the ISSB show a convergence of global standards, interoperability of standards remains a key challenge for large, multinational institutions as well as investors using the standards to compare sustainability related performance. For example, FIs with operations in Europe will not only have to meet the comprehensive CSRD requirements but also the unique reporting requirements of other initiatives they have (voluntarily) committed to, such as the TCFD or PCAF (Partnership for Carbon Accounting Financials) and PBAF (Partnership for Biodiversity Accounting Financials) as well as those of any other markets in which they are operating.
To date over 30 different regulations have resulted in several thousands of different KPIs, creating a complexity that can seldom be managed properly in–house, even for the largest financial organisations. Enter the unsung hero of this transformative journey: software solutions.
Benefits of ESG standard software
When to make use of standard software? When everyone needs to do it, it should be standard software. Similar to the evolving nature of the regulations themselves, FIs have had to build up their own capabilities. In-house expertise and home-made tools were of course the choice for a long time, but in the face of complex ESG regulations and data intricacies, this is about to change as FIs are more frequently turning to innovative software solutions as their trusted allies. This represents a paradigm shift in how the financial industry is approaching compliance, sustainability and reporting: more and more as an integral part of running their organisation.
ESG software automates the process of collecting, aggregating and calculating vast amounts of ESG-related data from diverse sources. This minimises the risk of human errors and accelerates the data collection process. In addition to that, software solutions are scalable and adaptable to the evolving regulatory landscape. They can accommodate changes in ESG reporting requirements, support new ESG standards, and adjust to an institution’s specific needs. This flexibility ensures that FIs remain agile and responsive to the ever-changing ESG landscape.
Once the data is collected, ESG software empowers FIs with robust analytical tools. It allows for in-depth analysis of ESG metrics, helping them to identify trends, outliers, and opportunities for improvement and investment. The software’s reporting capabilities enable institutions to generate comprehensive ESG reports that are not only compliant with various regulatory frameworks but also user-friendly and visually engaging, making it easier to communicate performance to stakeholders.
Experts that were formerly held up with manually updating spreadsheets, can now move towards working with the calculations the software has done for them and support decision-making within the organisation: they can actively use the data and insights to expand loan and investment strategies and business decisions. By aligning their portfolios with ESG values, they can cater to the growing demand from investors for responsible and sustainable investments, while simultaneously managing risk and seeking potential financial advantages.
Time to act is now
With the clock ticking and the ESG regulatory landscape becoming increasingly complex and ever-evolving, FIs find themselves at a pivotal juncture. The path to ESG compliance is neither straightforward nor stagnant, making the role of ESG software solutions all the more critical. The right software tools are the financial sector’s best ally, offering a blend of data management and analytics enabling timely, fast and reliable reporting. The software’s ability to streamline ESG compliance and adapt to changing regulations positions it as the indispensable partner for financial institutions as they navigate the complexities of the ESG regulatory landscape. The time to leverage this ally is now.