New ESG laws will force big changes on banks

 

This article was written by Fabrice Asvazadourian Managing Director – Strategy & Consulting, Banking Lead, Europe – Accenture. You can find the original article here. 

Banks in Europe need to prepare for the biggest set of regulatory changes since the aftermath of the 2008 global financial crisis. They’ll soon have to comply with sweeping sustainability rules drafted by national governments and financial services regulators.  

The impact of the proposed sustainability requirements will be one of the major forces shaping the banking industry in the coming year, according to the Accenture Banking Top 10 Trends for 2022 report. Banks need to ready themselves for the onset of a new business environment. Sustainability will rank alongside traditional performance criteria such as return on investment, creditworthiness and management track-records.  

The new sustainability regulations require European banks to report the ESG status of corporate customers. They’ll have to show that their lending practices support companies with good sustainability records. Furthermore, they’ll need to prove that they’re loosening ties with firms that are poor ESG performers. These regulatory changes will have a big effect on banks’ credit activities. Many institutions will have to revalue their lending books. Banking loans to fossil fuel companies, for example, totalled more than €3.5 trillion in the five years to the end of 2020. Industry regulators and other sustainability advocates will expect banks to rein in such loans. 

Data solutions overhaul essential 

It’s essential that banks start overhauling their policies, processes and data solutions.  Unless they have prompt access to accurate information about their customers’ sustainability status, they’ll be unable to satisfy the requirements of regulators.  

What’s more, without clear insight into their customers’ sustainability performances banks will find it difficult to distinguish between companies that are earnest in their efforts to improve their ESG track records and those that are engaging in cosmetic “greenwashing”. Such confusion could result in banks missing opportunities to fund lucrative sustainable initiatives. Or worse, it could lead them to fund companies that have masked poor sustainability records. The backlash from regulators, shareholders and the public against banks that support companies with bad sustainability credentials is likely to be severe. 

Operations review vital 

So, how can banks best prepare for looming sustainability regulations?  

They must revise their operations and technology resources. They need to be able to collect, store and retrieve information about their own sustainability performance as well as data about the actions of their corporate customers. To accomplish this transition, they ought to consider the following steps: 

  • In tandem with industry regulators and representatives, clarify ESG criteria and objectives.  
  • Set out a vision and a strategy that promotes the pursuit of ESG goals across the organization.  
  • Work with customers to define and agree upon frameworks to collect, store and report sustainability data. 
  • Devise a clear method for capturing, evaluating and sharing sustainability information.  
  • Integrate sustainability metrics into current and emerging cloud-based technology solutions.  
  • Draw on information from in-house metrics and performance indicators to deliver a strong narrative to external audiences about the organization’s contribution to sustainability.  

In my next blog post, I’ll discuss how European banks can learn from their US and Asian counterparts as they shift to cloud computing. The move to the cloud was one of the top trends in international banking last year. But banks in Europe are only now starting catch up with their peers elsewhere in the world.  

To discuss how banks in Europe can prepare for the onset of new sustainability regulations, contact me here. To learn more, read the full report, Accenture Banking Top 10 Trends for 2022.

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