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No Looking Back for Banks on the ESG Journey
No Looking Back for Banks on the ESG Journey

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Need

If there is a high-priority corporate agenda across industries that most leaders agree upon, it is around investments in the area of ESG (Environmental, Social, and Governance). The financial services industry has a huge role to play in enabling this change. Banks' focus in this space is being driven not only by their internal sustainability agenda but also by way of demands from their customers, regulators, industry groups, colleagues, and investors. Banks are expected to not only bring in capital but also to motivate their customers to adopt sustainable work practices by leveraging the all-important concept of ESG risk within their risk management frameworks.

While broadly banks have included their commitment to sustainable development goals within their vision & strategy, there remains a gap between aspirations and reality on the ground. This is because:

  • ESG aspects are inherent in how banks themselves and their clients do business and transactions. Moreover, individual sub-elements within ESG are interrelated with each other, have different importance by industries, and are difficult to measure accurately
  • The aberrations as ascertained by measuring KPIs within the ESG elements are typically dated and actions might impact client relationships - hence they are not acted upon quickly
  • With regards to banks' own internal operations, most procurement teams have a gap in the tools, data, and processes needed to report on the supplier regulatory targets. They still have the challenge to understand how many of their vendors and partners are ESG-compliant and where they are in their sustainability journey

The good part however is that banks have realized that halfhearted commitments to ESG principles is both a threat and a lost opportunity and hence might even be critical for their own existence. Ascertaining direct and indirect ESG risks aided by regulatory mandates, specifically ones that incorporate sustainability criteria associated with climate change on institutions’ balance sheets (i.e. physical and transition risk factors) need to be ascertained. On the other hand, banks cannot look the other way at the huge investments needed by companies and customers to fulfill their GHG targets.

                                     

 

Progress

Imbibing ESG goals and implementation behavior into the fabric of a Universal Bank is a complex and time-consuming task, a journey that most banks have started undertaking in the recent past. Leading banks have defined their ESG strategy and frameworks (refer to figure 1 & figure 2) and from a technology perspective initiated:

  • Building cloud data platforms
  • Investing in data management & analytics capabilities
  • Including ESG use cases into their automation charter
  • Establishing internal project tracking and regulatory reporting mechanism
  • Modernizing the product pricing systems for seamless new product creation

Of the above, the bank's investments in data and enabling capabilities have been the highest. Multiple data monetization use cases are being worked upon, ones that include negative & positive screening, thematic investing, creation of ESG AI risk models, etc. However, there needs to be heavy lifting when it comes to integrating & tracking ESG risk controls across lines of business, products & processes. This requires harmonizing KPIs by industries, defining thresholds and targets on predefined parameters, monitoring and resolving risk control red flags, and intuitive reporting. The outcomes of this initiative can result in improving the profitability of asset portfolios that banks manage while mitigating overall risks.

measurable esg initiatives

 

ESG gaining importance across Financial Institutions

                                     

                                     

  

Green Future

As the external regulatory requirements mature and the choice of technology platforms and partners evolve, the overall consulting and implementation spending in this space will increase by leaps and bounds each year. Investments in ESG and measurement of the impact will be very different across lines of business such as asset management, wealth, retail, and corporate banking due to the inherent nature of services rendered to these target segments. However, all this will only be possible by way of collaborative efforts between banks and service providers keeping local communities and investors in mind. The coming few years will be critical for banks to walk the talk when it comes to their defined ESG paths. The technology foundations will be critical for success and the time to focus on those is now.  


About the author:

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Sachin Kumar
Vice President - Banking & Financial Services, ITC Infotech

Sachin is a digital leader and brings in more than 20 years of rich work experience, initially in retail & commercial banking and more recently in FinTech and technology consulting across reputed organizations. Sachin has worked with global financial institutions across North America, the UK, India, the Middle East & South Africa. He has in the recent past been a key member of a FinTech startup, worked on multiple banking technology transformation programs as well as led technology consulting teams. During the initial part of his work experience, he worked in the areas of retail and commercial banking. He was responsible for setting up the retail assets business while being part of the personal banking division of a global bank besides growing the commercial asset finance portfolio for a leading non-banking finance company. He currently leads the BFS Consulting Practice for a reputed technology services and solutions company with a focus on themes such as Personalization, Open Banking, Financial Crime Management, Crypto Banking & Sustainability

 


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ITC Infotech is a leading global technology services and solutions provider, led by Business and Technology Consulting. ITC Infotech provides business-friendly solutions to help clients succeed and be future-ready, by seamlessly bringing together digital expertise, strong industry specific alliances and the unique ability to leverage deep domain expertise from ITC Group businesses. The company provides technology solutions and services to enterprises across industries such as Banking & Financial Services, Healthcare, Manufacturing, Consumer Goods, Travel and Hospitality, through a combination of traditional and newer business models, as a long-term sustainable partner. ITC Infotech is a wholly owned subsidiary of ITC Ltd. ITC is one of India’s leading private sector companies and a diversified conglomerate with businesses spanning Consumer Goods, Hotels, Paperboards and Packaging, Agri Business and Information Technology. For more information, please visit: http://www.itcinfotech.com/

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