How banks can become ESG ready - and incorporate it into new business streams

How banks can become ESG ready - and incorporate it into new business streams

ESG is crucial to becoming a modern business. As the banking industry gathered at the Di BankTech event in Stockholm, we deep-dived into key challenges for financial services institutions when it comes to ESG commitments, establishing a data-driven approach and forming an ESG-inclusive culture.

Originating from a Dun & Bradstreet in-house unit in the mid-90s, Cognizant as a company is born and bred in the banking sphere. Today, we serve over 500 clients in global and regional banks, and among them 9 of the top 10 European financial institutions. Our track record gives us the privilege of having followed many of the major finance players as they evolve. 

So, what’s keeping C-level within financial services awake at night? Delivering on ESG expectations and requirements – but also exploring ESG’s business potential. Yes, regulations are a major driver, but more importantly, it’s about preparing to meet the demands of the future. 

Inclusion of ESG factors in investment 

Most have embarked on the sustainability journey already, but while the “why” is obvious, the “how” is yet to be discovered. ESG integration within banking requires a holistic approach to investment analysis, where material factors – ESG factors and traditional financial factors – are identified and assessed to form an investment decision. Uttermost, it’s about lowering risk and increasing returns.

What are the key challenges? While it varies, the common thread among our clients is that there are multiple and isolated ESG initiatives going on across the company, immature capabilities with manual steps that demand resources and an absence of accurate/complete data. All this is paired with an inconsistent understanding of ESG leading to inconsistent inputs across value chains.

Measures of ESG success

What should a future-ready bank look like in ESG terms then? My colleague and Cognizant’s ESG expert Noah Nzuki (check out his previous post about accelerating ESG transition) says that the measures of ESG success are about how well you stitch together the entire process: from implementing standard practices in capturing metrics, ensuring auditable and transparent data, applying trusted ESG reporting metrics, to offering data-driven ESG products and services and establishing a whole data ecosystem with partners and customers. 

Where to start? The first crucial step is about foundational aspects; setting the level of ambition, prioritizing ESG metrics and gathering data. It’s also important to understand the needs of different parts of the bank. 

Next step: ESG-infused business

Once you have the foundation, a bank can get an ESG view on a granular level, a view that provides actionable insights from a business perspective. It can be about understanding a product’s ESG impact, advising customers on sustainability, and identifying suitable ESG products/services and new revenues. 
  
What we see now is that banks are finding innovative ways to use ESG in a business context, such as green financing, portfolio decarbonization and carbon banking. The latter approach funds regenerative agricultural practices and connects farmers to net-zero committed businesses and organizations, a great example of applied ESG within the financial sector. 

I am sure we will see even more innovative projects and revenue streams linked to ESG ahead. To learn more about what is required from companies that want to thrive in the future, please visit our Modern Business site where we share insights from a survey of 2,000 senior business leaders. If you are curious to benchmark your company’s overall future-readiness, I suggest you try the Economist Impact’s tool.