What is sustainable finance and what important role will it play in the sustainability transition? Why is the ability to disclose accurate sustainability data crucial for financial organisations, and why are they struggling with this? What should financial institutions do to be ready for a sustainable future?

Sustainable finance gaining traction

What do we mean by sustainable finance? This question is not easy to answer since there is not one single definition. In the context of this blog, we refer to sustainable finance as the decision-making process where financial institutions take Environmental, Social and Governance (ESG) considerations into account. This should result in more investments in sustainable economic activities and projects.

So why is sustainable finance gaining more and more traction nowadays? Financial institutions feel the moral obligation to strive for the ethical aspiration toward a good life and humane society. They play a key role in the achievement of the European Green Deal and the EU’s international commitments on climate and sustainability goals. Financing and investment decisions can serve as key triggers to influence sustainable results and outcomes. By only agreeing to lend to and/or invest in companies that manage their ESG risks and impacts properly, financial institutions are in a unique position to drive the sustainability transition. In this way, the financial sector can play an important role in redefining “business as usual”, which will help achieve Europe’s goal of becoming climate neutral by 2050.

Mandatory sustainability data disclosure

Given the decisive role of sustainable finance within the sustainability transition, the ability to disclose accurate and reliable sustainability data is crucial for organisations in the financial sector. Financial institutions are stimulated to set clear and transparent ESG objectives, measure and monitor performance and communicate about how their sustainability initiatives contribute to the organisation, their clients and the world. The saying “you can’t manage what you don’t measure” fully applies here.

Furthermore, sustainability data disclosure builds trust and credibility with a growing number of stakeholders that demand greater insights into how financial organisations manage risks and opportunities related to ESG topics.

Heightened regulatory and legal scrutiny, along with other market developments, are clear indicators that the transparency and accuracy of sustainability reporting are increasingly important. Sustainability data disclosure has become a regulatory obligation. The three key EU regulations on sustainability disclosure currently are:

  1. The EU Non-Financial Reporting Directive (NFRD)
  2. The Sustainable Finance Disclosure Regulation (SFDR)
  3. The EU Taxonomy

The struggle of organisations

Despite the importance of sustainable finance and the obligation to accurately disclose sustainability data, organisations within the financial sector continue to struggle to give substance to this topic. Measuring, quantifying and reporting ESG objectives remains challenging for several reasons:

  • ESG-objectives are often qualitative in nature, making them hard to quantify and aggregate;
  • the complexity of social and environmental objectives adds to the difficulty of quantifying them;
  • and, most importantly, the reason is the lack of a unified and agreed-upon framework for organisations to report on their ESG objectives in a comprehensive and standardised way

Although several standardised sustainability reports have become available to help organisations communicate performance on their ESG objectives, these standards are still evolving.  The financial sector has an urgent need for a single standard for sustainability reporting that has the backing of all key stakeholders, including regulators.

How to act?

So, what should financial organisations do while the sustainability reporting standards continue to evolve? For sure, this is not the time to do nothing and wait for a single sustainability reporting standard or clear, harmonised directives for sustainability data disclosure. Instead, now is the time for organisations to start shaping their future landscape around sustainability reporting and disclosure expectations.

Sustainable finance will radically change the business models of financial institutions; reporting requirements and the first steps of risk integration are just the beginning of this journey. The demand for sustainability reporting will only increase in the coming years, as will the requirement that such reporting must be transparent, accurate and reliable. Soon, sustainable data will be incorporated throughout the whole value chain; from onboarding clients and servicing clients to integrating it into risk management. That is why financial organisations need to design a plan on how to embed ESG objectives and considerations into their business model and reporting cycle in a manner that reinforces value creation while minimising risk.

Thanks to our expertise and knowledge regarding sustainable finance and our strength in connecting processes, governance and way of working by supporting technology and data, we are perfectly capable to support financial organisations in their journey to shape their landscape around sustainability reporting and disclosure expectations.

Are you triggered by the content of this article or interested in a real-life engagement on how our data management capability helped a financial institution to standardise their ESG data for reporting? Please do not hesitate to contact us to discuss how they can help your organisation to be ready for a sustainable future!

Michiel Kos
Senior Manager
michiel.kos@valcon.com