It’s no secret that the financial services industry must respond to and mitigate climate change effects while financing sustainable initiatives. The financial impact of climate change related events and risks along with legislative pressures drive the urgency of integrating environmental, social, and governance (ESG) factors into decision making for financial institutions around the world. Even though the risks and challenges are significant, financial institutions have a unique opportunity to develop—and benefit from—technological advancements that can promote sustainable growth, build a sustainable economy and healthier ecosystem.
A snapshot of the challenges faced by the financial industry:
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ESG is an evolving and complex discipline that is multilayered and interconnected which makes managing and assessing risks difficult. |
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Stakeholder pressure to decarbonize and the evolving landscape of regulatory and legislative requirements can pose a challenge for financial institutions. |
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Collecting, managing, and analyzing ESG data are major hurdles for banks and financial institutions. The entire spectrum of data management—from sourcing and quality checking to interpreting and modeling— is challenging. |
Knowing these key challenges, what can be done?
The challenges ahead require robust and modernized Information Technology (IT) and infrastructure, as many financial institutions manage their ESG data with inadequate tools and spreadsheets today. Having the right IT systems and infrastructure in place empowers financial institutions to effectively manage ESG related data, while also meeting the demands of the market and regulatory requirements. Financial firms are better equipped to establish and grow a sound risk assessment program through the following:
- Leveraging technology to manage physical and transition risk – When financial institutions assess climate-related risk, they account for all relevant stakeholders within their entity—from employees to customers and to supply chains both for physical and transition risk.
Climate-related physical risk refers to risk that impacts the operations of a financial institution, its customers, and the wider economy. Physical risk would include extreme weather events and shifts in the climate that have a negative impact on the asset prices. [1] Transition risk encompasses risk that influences a financial institution’s products and services as a result of the move toward to a lower carbon economy. They include how a financial institution supports or has financial relations with companies that have a greenhouse gas (GHG) footprint (like most companies do), evolving stakeholder expectations and associated legal or regulatory changes. [2] These risks also drive the evolution of finance offerings and influence sustainable financial product roadmaps.
By housing key data within software hosted on a strong infrastructure, financial institutions can analyze both physical and transition risks. These institutions will also want to identify and mitigate climate-, as well as other ESG-related risks, within the framework of a robust and holistic governance and audit program. Managing ESG separately leaves it disconnected from organizational priorities. Instead, ESG-related risk management, audit testing, issue and remediation tracking should be prioritized in the context of Enterprise Risk Management (ERM) and Audit activities.
“The centrality of a sound Information Architecture, designed to create a connected continuum of data management, computations, and disclosures, is the bedrock of an effective ESG ecosystem. As IMF (International Monetary Fund) rightly urges, there is an urgent need to strengthen the climate information architecture, the first of the building blocks of which is high quality, reliable and comparable data.” [1]
Saloni Ramakrishna, Senior Director, Oracle Financial Services
- Leveraging technology to show progress towards goals and respond to stakeholder and regulatory pressure – With the release of the U.S. Securities and Exchange Commission (SEC) climate disclosure rules, International Sustainability Standards Board (ISSB) and European Sustainability Reporting Standards (ESRS), and others, stakeholders, investors, and regulators look to these frameworks to standardize sustainability reporting. In 2024 and 2025, the Corporate Sustainability Reporting Directive (CSRD) will come into force for many banks operating in the EU. For the first time, they will be legally required to include reliable and auditable sustainability data alongside financial information in their annual reports. Technology can support data collection and management to relay current and future state of an organization’s sustainability journey to unveil progress towards goals and respond to these regulatory pressures.
- Leveraging technology to source and manage ESG related data – The main challenge lies in capturing environmental & social data both from external and internal sources such as calculating the fims’own carbon footprint, but also as Scope 3 focus, determining the sustainability levels of investments and/or financing exposures. On the Social area, key data related to Employees diversity, Customer Satisfaction or Community investments are needed from multiple sources everywhere across the firms and externally. Leveraging technology to source and manage ESG-related data enhances efficiency, accuracy, and consistency by automating data collection and real-time monitoring, thereby reducing manual effort and errors. Solutions exist today that provide the capabilities to store, analyze, manage, and report on this data. Strong information architectures are also key to host this data and the applications mentioned earlier. The possibilities extend far beyond these capabilities as technology continues to evolve to respond to regulatory and stakeholder demands and provide transparency into ESG.
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$1.7 – $3.1 trillion |
…The global cost of climate change damage is estimated to be between $1.7 trillion and $3.1 trillion per year by 2050.[3] |
For more specific solutions, below are examples of how Oracle technology can support financial institutions in addressing these key challenges:
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To assist organizations on this journey, there are a variety of features within Oracle Risk Management Cloud that can help streamline and automate governance, risk and control (GRC) activities, including ESG governance and audit. Oracle Risk Management Cloud is part of the Oracle Fusion Cloud ERP family of applications. It helps streamline and automate risks and compliance activities to help organizations reduce risk while increasing efficiency.
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Oracle’s Climate Solution Pack Oracle’s Climate Solution Pack enables financial Institutions to calculate and analyze the impact of their carbon emissions, as well as climate targets on current and planned investments. Oracle’s Climate Solution Pack includes a host of capabilities such as, Partnership for Carbon Accounting Financials (PCAF) and GHG based emissions calculations—encompassing not only greenhouse gas emissions of an organization’s operations but also financed, facilitated, and avoided emissions from its customers. The solution pack also provides Artificial Intelligence (AI) and Machine Learning (ML) based search of emission metrics from ESG or annual reports, predesigned data management accelerators, prebuilt data sets for cross-jurisdictional global disclosures (like the ISSB) and regulatory reporting (ESRS, U.S. SEC, TCFD, etc.), as well as climate scoring of counter parties. The value of climate scoring of counter parties, a questionnaire based scoring model that looks at both qualitative and quantitative criteria, is that it enables financial organizations to embed the score into their Enterprise Risk Management processes.
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Oracle Cloud EPM for Sustainability Oracle Cloud EPM helps collect, standardize, and aggregate ESG data, with robust dashboarding, full Microsoft Office integration, and complete ad-hoc insight across all ESG KPIs. Users can satisfy GRI, CSRD, SASB and other ESG reporting frameworks, as well as internal and external reporting requirements for management, narrative and regulatory reporting. All stakeholders are included in a collaborative, process-driven approach for defining, authoring, reviewing, and publishing ESG, and other report packages for internal and external consumption.
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Coming soon: Oracle Fusion Cloud Sustainability, a solution for capturing and managing the sustainability data associated with environmental, social, and governance activities. Fusion Cloud Sustainability will be deeply integrated with the Fusion applications that customers already use to manage day-to-day operations. It will provide decision makers at all levels of an organization with the up-to-date, accurate, thorough data they need to help accelerate progress toward sustainability goals and support a transition to more sustainable business models. |
To move forward, the question that financial services businesses must ask themselves now is how they plan to respond to climate-related risk. Will the approach to ESG be more reactive (compliance with regulations), or more proactive leveraging the opportunity to get on the front foot to transition the world toward a more sustainable future? Whatever is the response, the ever-evolving landscape of ESG oversight also presents a reskilling challenge for financial services professionals. They will need to keep themselves abreast of these changes to effectively inform the right decision-making for their businesses. But at least they will do so with the most supportive and adequate technology.
Learn more about how Oracle Fusion Cloud Enterprise Planning (ERP) and Oracle Fusion Cloud Supply Chain Management (SCM) support customers to configure, track, capture, and measure ESG data at the source, building sustainability into the foundation of business processes.
To learn more about the launch of Oracle Fusion Cloud Sustainability, join us at Oracle CloudWorld in Las Vegas September 9-12, 2024. Register today!