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The financial services sector is a highly regulated sector for ESG due to its extensive reach into the economic value chain. Rating agencies score companies on ESG performance indicators, which influence investment decision-making. Regulators are watching financiers and underwriters for their high exposure to a multitude of sustainability-related risks.
Banks and insurance companies interact with a wide breadth of clients and customers. The challenge: Each of those Entities presents different ESG risks that vary by sector and industry.
But Credit risk isn’t limited to purely business or financial management anymore. The financial damage to a client from an extreme weather event or from a social petition could wreck the performance of an otherwise healthy portfolio.
And that’s not considering the reputational and regulatory damage from such an event, which could be held as neglect or failure to conduct ESG due diligence and to fulfil risk management obligations. Environmental, social, and governance indicators are essential to painting an accurate picture of portfolio exposure for all products and services. Investors, banks, and insurance are increasingly looking into details of all three categories for decision making, and overall seeking more detail and transparency from stakeholders.
Reporting on the vast breadth of ESG data in banking and insurance inevitably involves the extraction of large volumes of data. From external public and private sources. The approach to standardizing and verifying aggregate data was to this day often manual in nature. It often heavily relied on spreadsheet management by an employee.
As a result, disclosures are often incomplete, unsubstantiated, or inaccurate at times. ESG data needs to be more efficiently and accurately identified, extracted, and matched. Reporting and investor requests will otherwise not be matched.
The investment community has pushed for standardization of sustainability information in the financial services sector by creating its own benchmarks and standards. Many frameworks including TCFD, CDP, GRESB, GRI, SASB, and the European Taxonomy concern all industries.
These are the foundation of ESG reporting. They serve as information complements for ratings for indicators like S&P Global, Dow Jones Sustainability Index, and FTSE4Good. Rating agencies have their own set of sustainability criteria that they use to assess the ESG performance of companies. Crossing all these data elements can inform your selection of indicators and disclosure metrics.
In the banking and insurance industry, 74% of surveyed respondents considered that producing investor-grade information is a priority of their ESG reporting. Technologies for the latter are an important tool in the reporting architecture to ensure the quality of disclosures meets investor requirements.