According to a new report drafted by Microsoft solutions provider Avanade and global non-profit organisation EFMA, over 50 per cent of banks will not hit net zero carbon operations until 2025.
The report titled, Taking sustainability seriously: Are banks ready?, based on 51 interviews with respondents from 25 countries, revealed that only a small proportion (15 per cent) of banks have already achieved this position, while the majority (57 per cent) will not be ready until 2025.
Moreover, just over a quarter (26 per cent) were found to be on track to becoming carbon neutral in the next 12 to 24 months.
The research also revealed that while serious demands are expected to be placed upon banks by regulators over the next 12 months, most are struggling to monitor and track their progress towards ESG commitments.
In fact, only 53 per cent of banks said they will be ready for regulatory reporting in the next six months, while 18 per cent remained unclear on the requirements. Worryingly, the research revealed that 29 per cent of banks will not be ready for at least another year.
Commenting on the research, financial services lead at Avanade Australia, Saurabh Verma, said that keeping up with rapid regulatory changes alongside supporting consumers on opportunities presented by ESG is the “biggest challenge for banks in Australia.”
“There is a fair investment of time, energy and capacity that is required. 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,” said Mr Verma.
On a more positive note, the research showed that the banks do recognise the positive impacts ESG has on their market reputation and credibility.
ESG was also viewed as enhancing a bank’s balance sheet protection (50 per cent), attracting younger groups of consumers, such as Millennials and Gen Y/Z (44 per cent) and enabling better energy and waste management (34 per cent).
In addition, increasing ESG investment options to attract younger customers is now the top priority for banks (42 per cent), followed by greater transparency on the transition to a low carbon footprint (36 per cent), fuller disclosure and reporting (34 per cent) and a greener product portfolio (32 per cent).
“Banks have moved beyond merely including ESG goals in their mission statements,” said John Berry, CEO of EFMA.
“They are now looking at how they can enact sustainable change. Banking leaders do not view sustainability as a challenge, but a major opportunity – probably the biggest one over the next decade.”
Digging deeper into the barriers, the research uncovered that data integration is the biggest challenge to climate risk analysis. Namely, almost a third of banks (32 per cent) said they are struggling with the lack of integration of climate risk data with their risk management framework.
Concerningly, only one in four banks were found to have a completed climate risk model.
A cluster of issues were identified, including the unaudited nature of emissions data reported by non-financial companies, immature reporting/disclosure systems, lack of climate model building skills and too many green financial standards and ratings.
Concluding that there is clearly still plenty for banks to do, the research made five recommendations, including the need for banks to:
- ‘Lean into green’ through their product portfolio to appeal to younger customers;
- Creating robust stress testing and scenario analysis for climate risk;
- Show full transparency in their operations;
- Leveraging technology to capture data more effectively in order to generate better reporting, scenario planning and risk management;
- Make hard choices about where to disinvest completely to demonstrate a clear transition program to a low-carbon investment portfolio.