Optimised reporting on financed emissions: a must for future-focused financial institutions

It’s a global trend, and one to which UK financial institutions are not immune:  the increasing pressure to align business operations with global sustainability standards.

Any future climate action must take a data-based approach to ensure transparency

For these organisations, reducing their own direct carbon footprint is the simple part. The more complex task is assessing the climate impact of lending and investment portfolios.

A 2019 report by WWF and Greenpeace found that investments held by the UK’s biggest banks and investors emitted 805 million tonnes of carbon a year. It went as far to say that if this industry were an independent nation, it would rank 9th in the world for carbon emissions. So, while 86% of banks have disclosed targets related to becoming net zero in financed emissions by 2050 (according to KPMG), they still have a long way to go.

The reality of the situation is by no means lost on FIs. Potential fines and penalties for non-compliance and lost business due to reputational damage are two of the biggest fears commonly cited amongst UK financial organisations as the most worrisome costs of climate inaction.

It’s clear that there is a general acknowledgement of the urgent need for robust sustainability strategies, not only for the sake of the wider global climate agenda, but for the future of these businesses themselves in a low-carbon economy.

At risk of falling behind

More and more attention is being placed on financial institutions and their portfolios. The scrutiny from stakeholders, combined with increasingly strict regulations such as the CSRD, SFDR and UK SDR, put the onus on banks and other financial institutions to be stringent in their reporting and disclosures. But could this mounting pressure put financial institutions – particularly smaller organisations – at risk of collapsing?

So far, financial institutions have taken a phased approach to disclosing emissions data as they work to include more asset classes and sectors. In order to align with industry expectations, the pace needs to quicken.

Another identifiable issue is the use by financial institutions of different data sources, and different data types, to calculate financed emissions. When proxies are used instead of verified activity-based emissions, the data becomes less complete, and therefore less reliable, jeopardising the calculation of the organisation’s total financed emissions.

Clearly, responsibility does not lie solely with financial institutions. We hear global calls for better emissions data capture and reporting across all businesses. However, in the meantime, there are clear demands on financial institutions to produce the most accurate data possible.

My company, in partnership with Capgemini Invent, recently surveyed financial organisations in the US, UK, Germany and France, and found that 35% of them have not completed a ‘double materiality’ assessment, as required by the European Union’s CSRD regulation.

This gap exposes these firms and their stakeholders to unacknowledged environmental and financial risks, which can severely impact strategic planning and risk management processes. As we have established, ensuring compliance with regulations like the CSRD is high on financial institutions’ radar. The failure to address these requirements not only threatens compliance now, but also strategic foresight in managing sustainability commitments in the future.

Cracking down on reporting

The number one frustration in developing sustainability strategies among financial institutions we surveyed, is the complexity of data and the difficulty in making meaningful analysis of it, despite sustainability managers spending a large proportion of their time on data management – sometimes upwards of six hours a week just consolidating data.

Part of the issue is that 76% of these organisations still rely on manual, error-prone spreadsheets for reporting their own emissions. Over half (57%) still use spreadsheets to track financed emissions.

The success of the UK’s financial sector in the low-carbon economy of the future will depend on each organisation’s ability to optimise its reporting on its own emissions, as well as those of its portfolios. Any future climate action must take a data-based approach to ensure transparency, effective analysis of results, and the ability to change course if circumstances change.