Meeting the need for data certainty in sustainability-linked finance
Maybe data can now align, making Sustainable Finance truly shine and after all it’s our financial wonderwall…
With the Gallagher brothers making their comeback, it’s only fitting we hope for a 'Wonderwall' moment in sustainable finance: let’s gauge how standard data and certainty lead to better sustainable decision making.
The traditional approach to evaluating investments – based almost exclusively on the relationship between risk and return – is lacking a sustainability perspective.
The current landscape is marred by a lack of education, the absence of standardized and reliable ESG data, regulatory voids, and an overriding emphasis on short-term ROI.
Business practices are slowly evolving, now integrating environmental and social (E&S) factors into decision-making processes, but with minimal focus on the long term.
The long-term vision is to develop more E&S-linked financial products, making them accessible to a broader market and striking a balance between financial returns and sustainable long-term performance.
E&S data enhances decision-making in the lending market by providing insights into environmental and social risks, leading to more informed and responsible lending practices.
Environmental Data:
Natural resource availability and sustainability data for water and forests provide critical insights for evaluating potential risks and opportunities in the long-term viability of loan and bond portfolios.
Carbon footprint and emissions data tied to various corporates and business lines drive analysis, identifying and supporting low-carbon initiative lending opportunities.
Climate data, including localized temperature patterns, helps assess lending risks based on location and business lines, thereby accelerating the energy transition by channelling more capital towards energy-efficient borrowers and investors.
Social Data:
Gender equality data provides crucial indicators on inequalities in education, employment, entrepreneurship, location, and the pay gap. This leads to more informed long-term Know Your Client (KYC) lending decisions across all portfolios, involving banks, borrowers, and investors.
Sustainable Cities & Communities data tracks safe housing performances, which enhances positive incentive across portfolio. Furthermore, the creation of a new social impact policy for corporate lending ties interest rates to social impact key performance indicators, fostering a more equitable financial landscape.
E&S data must become the core DNA of bank's portfolio, driving better long-term ROI and minimizing both short and long-term risks. Responsible and sustainable lending, guided by the highest ethical standards, is key to linking E&S considerations to borrowers and investors, resulting in a greater societal impact through Sustainable-Linked Loans (SLLs) and Bonds (SLBs).
Incorporating E&S values into risk and return decisions necessitates a strategic approach, integrating comprehensive environmental and social data assessments to enhance long-term financial performance and sustainability.
Establishing a robust framework requires increased regulation, enhanced education, standardized reporting, and data collaboration, all aligned with sustainable objectives. Deepening relationships between banks and corporate clients through an improved KYC approach is essential. Banks need a comprehensive understanding of E&S values to foster closer client relationships.
For instance, Lloyd’s Banking Group, in collaboration with CISL, has trained over 640 staff members on climate change and sustainability-related risks and opportunities. This initiative leads to more informed decisions on corporate E&S risks and returns.
BNP Paribas also demonstrates leadership by strengthening its collaboration with corporate clients. The successful partnership between BNP Paribas and UPM exemplifies this approach, with both parties benefiting from mutual learning and improved understanding of E&S performance.
Such actions are pivotal in evaluating corporate creditworthiness and aiding investors in making informed investment decisions. Incorporating E&S in prudential requirements is crucial as many financial system actors lack awareness of their exposure to climate change risks. Adhering to the UN’s principles for responsible banking, particularly Principle 2, is essential for managing risks and enhancing positive impacts on E&S factors, leading to more educated risk and return decisions.
The need for standardization and certainty
In a market that is characterized as being fragmented, volatile, and uncertain, as well as complex and ambiguous, all parties are looking for standardization and certainty in terms of risk-based ESG returns, measurement, reporting and data reliability.
In essence, data will be the foremost driver of action and decision making in the sustainable finance space. Banks will need to be able to accurately define, record and store standardized data to help customers carry out the necessary reporting and audit processes.
It is against this market background that Finastra has developed our ESG Service for sustainable finance. Finastra’s ESG Service is a software-as-a-service solution that simplifies ESG and sustainability-linked lending. It facilitates the integration of sustainability performance targets (SPT) criteria into ESG pricing, helping banks deliver a better, sustainable lending experience to their corporate clients.
As regulations regarding ESG lending continue to evolve, there is no doubt that corporates across the globe will look to financial institutions for support and guidance in accessing sustainable funding. Banks that are well-prepared to meet their needs will make the most of the opportunity, while meeting their own ESG goals at the same time.
As we strive for a 'Wonderwall' in sustainable finance, maybe, just maybe, we’re gonna be the ones that change the world for the better!
Sandrine Markham
Finastra has appointed Sandrine Markham to lead its global Sustainable Finance solutions. With more than 20 years’ experience in financial data and technology, Markham has worked in transformational roles to deliver key technology in the loan and bonds markets. Applying the company’s business mantra...
