Banks play a key role in paving the path toward a more sustainable future, especially as many industries continue to prioritize decarbonization. By funding new technologies and implementing environmental, social, and governance (ESG) strategies into risk management and lending decisions, banks are leading the growth of the green economy.

This is partly due to increased consumer demand for more sustainable banking services. It's also because emissions management isn't purely a regulatory or compliance concern anymore-it's a necessity to remain competitive. As banks usually have limited direct (scope 1) and indirect (scope 2) emissions, the finance sector's main consideration and focus should be directed toward their financed emissions (scope 3, category 15).

"Financed emissions" refer to the greenhouse gas emissions associated with activities financed by the bank, including emissions from investments, borrowers, and underwriting. These emissions are often the hardest to measure, as data availability and accuracy can vary.

Despite these challenges, banks should treat financed emissions as an important part of their wider ESG strategy and emissions accounting. The baseline for this process is a well-established and managed ESG data governance.

What is ESG data governance and why is it important?

ESG data governance encompasses the processes and frameworks implemented by banks to collect, validate, store, manage, and secure ESG-related data. Good ESG data governance ensures that data meets high standards of accuracy, consistency, and transparency, and is verifiable. This enables banks to make informed decisions and risk assessments when it comes to their emissions strategy and investment opportunities.

One of the main proven challenges for banks has been the siloed nature of their emissions data, and the lack of centralized data management systems that are available across the business to help with data governance.

Key areas of ESG data governance

There are three areas of ESG data governance banks should consider:

1. Data collection and validation processes: Banks must establish robust mechanisms for collecting emissions data from different sources, including internal systems, third-party providers, and industry databases. Despite nearly all current targets and reports largely relying on proxy and estimated data, banks should make it a priority to source real data wherever possible, as data collection methods continue to improve and availability increases. According to a 2023 PwC Global Investor Survey, 94% of investors believe corporate reporting contains at least some level of unsupported sustainability claims. To assure investors of the reliability of emissions data and mitigate risks of greenwashing, banks should adopt rigorous validation processes to verify the accuracy and reliability of this data
2. Data storage and management systems: One of the main emissions data challenges, especially with scope 3 emissions, is the sheer volume of data. Robust and safe storage systems are needed to effectively manage bank ESG data, and cloud-based platforms and integrated databases can facilitate efficient data storage while enabling real-time access and analysis
3. Data privacy and security measures: Given the sensitive nature of ESG data, banks must prioritize stringent privacy and security measures to protect against unauthorized access, data breaches, and cyber threats

Why ESG data governance is crucial for banks

Having robust ESG data governance is imperative for banks to make strategic future decisions and manage risks related to different climate scenarios. Banks without integrated ESG data governance not only risk being exposed to potential greenwashing with non-verifiable data, but might also miss reaching their targets, as well as losing green capital and new investment opportunities.

Enhanced risk management

ESG data governance enables banks to identify and mitigate ESG-related risks, including physical and transition risks as well as nature-related and modern slavery risks. By integrating ESG factors into risk assessment models, banks can anticipate emerging risks and develop proactive strategies to prepare.

Improved decision-making processes

Banks that integrate ESG considerations into lending criteria and align their portfolios with sustainability objectives are better positioned to make informed decisions and leverage opportunities related to the climate-transition. By analyzing ESG data, banks can evaluate the sustainability performance of potential borrowers and assess their exposure to ESG-related risks, protecting their bottom line.

Focussing on data governance will also help banks conduct market analysis and identify potential untapped opportunities in their portfolio. For example, by incentivizing borrowing partners with ESG compliance, banks can lower their own financed emissions and enhance their credibility as a responsible lender.

Strengthened regulatory compliance

Regulatory bodies worldwide are increasingly mandating climate-related financial disclosures, reflecting the growing importance of sustainability in the financial sector. Based on the International Sustainability Standards Board's Sustainability Standards (IFRS S1 and IFRS S2), the Australian Accounting Standards Board has developed its own Sustainability Standards (ASRS 1, ASRS 2 and ASRS 101) that domestic emissions reporting will follow.

Mandatory reporting for larger companies begins early 2025, and good ESG data governance is the first and essential step for managing and reporting on impact. By prioritizing their ESG systems and compliance now, banks can future-proof their operations and avoid risk of fines and reputational damage.

Best practices for banks to establish ESG data governance frameworks

To align with industry best practices, banks should first assess how they currently obtain their emissions data and invest in an end-to-end technology platform, like Workiva Carbon, to streamline their emissions data management before they establish data governance frameworks. As part of the process, banks must first identify current data gaps and inefficiencies to gain an understanding of where their emissions come from.

1. Establish clear data governance policies and procedures

Banks can begin establishing their frameworks by assessing their current ESG data governance policies and procedures. This includes identifying who in the organization is responsible for ESG data management. Banks should integrate ESG data governance into core operations across the business, while ensuring relevant people and teams have ownership of managing the process.

When establishing standard procedure, banks must also identify gaps in their emissions data and how to account for this in reporting, identify standard industry metrics, and assess sources and accuracy of available data.

2. Invest in technology and infrastructure for data management

In many organizations, the management of emissions data has traditionally been fragmented, with no single central platform to collect and measure data. Investing in essential technology infrastructure is crucial if banks wish to make their ESG data governance as efficient, reliable, and adaptable as possible.

Workiva Carbon provides a single platform to measure, manage, and report on their emissions and emissions data. The platform allows you to collect data from ERP platforms, accounting systems and utility providers, survey and score data of your suppliers, set science-based targets, offset unavoidable emissions, and prepare your data for reporting and auditing.

3. Provide ongoing training and education for staff

In a 2022 UTS survey, 63% of respondents working in the finance sector said they needed upskilling when it came to climate-related issues. Proper understanding, resources, and continued education is needed as sustainability regulations and risks keep evolving.

Banks should extend ESG training across the whole organization, as knowledge in sustainability matters is increasingly sought after by stakeholders, consumers, and investors alike.

Integrating ESG training into the bank's core operations will help them stay ahead of changes and strategically placed in a competitive environment.

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