ESG and Data Quality

Environmental, Social, Governance (ESG) – you have most likely heard of it, but what is it? And what does it mean for the future of commercial lending? ESG has become an umbrella term that can encompass a large number of related terms and issues, all of which represent risks to businesses, economies, society, the planet, and efforts to address those risks. Consumer demand for ethically and sustainably sourced products has led to corporate social responsibility (CSR) commitments that reach across industries and supply chains. This, in turn, has led more and more businesses to consider ESG a new benchmark in evaluating and deciding on a financial institution.

Awareness and agreement have increased dramatically over the past decade – in social, business, and financial worlds alike – about the importance and risks of ESG issues to the long-term well-being and sustainability of human society, economic growth, and the planet itself. In the past few years, we have seen:

Huge growth in sustainable investments and influx into investment funds
90% of global public investors prioritizing ESG investment policies
Increased support from governments and governmental organizations for ‘green’ projects, both via regulation and fiscal spending
Proof of better financial performance by companies incorporating ESG
An uptick in financing and investing in ESG-focused companies and projects, with implications for banks and commercial lending
An increased commitment from central banks (e.g., NGFS) to include climate change in stress tests has accelerated commitment and shown vulnerability of global financial system to non-financial risks

Driven by changing social forces and accelerated by the COVID-19 pandemic, discussions around ESG have risen to even more prominence, and priority, in the past year. Today, most major banks are engaging in sustainable finance solutions in support of clients’ increased focus on ESG. But if we’re going to judge an institution based on its response to ESG pressures, what do those benchmarks look like? In striving to incorporate ESG, we need to answer:

How can it be defined? quantified? measured? classified? standardized? disclosed?
How do we determine relative comparability among other standards/metrics?
What determines meaningful impact, and what separates it from “greenwashing?”
What is the right impact threshold to qualify as a ‘green’ project?
How do we translate ESG data and impact into economic impact?

The critical issue is the essentially subjective nature of ESG information, which is inherently qualitative, non-financial, and not readily translatable to monetary terms. It is difficult to quantify, verify, and compare. To develop and define ways to support the goals of these initiatives, and to address the needs of investors for more ESG-related data, a multitude of organizations, reports and proposed frameworks have proliferated in order to promote approaches, definitions, standards, metrics and ratings for various ESG segments. However, the proliferation of organizations and proposals has led to a present state of fragmentation, lack of consensus and inconsistency. Investors have more data but still lack uniformity, comparability and reliability.

Coordination of initiatives and events is a key issue, but perhaps above all else as far as investment is concerned, the remaining gaps and challenges concern data. There are now encouraging signs that consensus may yet develop in ESG data and reporting. A coalition involving WEF/IBC and accounting firms (Deloitte, KPMG, PwC, EY) issued in September a proposed framework (“Measuring Stakeholder Capitalism”) for global ESG standards with the goal to “define common metrics for sustainable value creation,” drawing upon and intending to coalesce existing frameworks and standards. The paramount issue for operations and servicing will be flexibility and agility around the data collected, with an eye toward:

Definition
Standardization
Collection
Disclosure
Analysis
Correlation to finance
Reporting

So, then, a clear measure of success will, as with most other areas in finance, come down to the clarity, consistency, and quality of the data we collect. The necessity of adopting data integrity as a best practice throughout financial institution processes has been clear for years; the need to have effective, comparable reporting on ESG initiatives is just the latest issue underscoring the need for data quality.

Luckily, the efficient and accurate collection and reporting of data has also been a primary focus for banks and their partners in the past decade. In commercial lending, data quality begins and ends with having the right technology in place. To ensure data that will effectively inform decisions and provide a basis for actionable reporting, banks need a technology partner/solution that can help make sense of the data, provide a process, and enable the furtherance of ESG goals. Critical components include:

A straight-through process to ensure data integrity and completeness
Real-time access to all data
Sustainable lending metrics incorporated directly within the loan onboarding process
Data flexibility whereby new fields can be easily and quickly added to the process
Comprehensive exposure and risk data including collateral, risk ratings, guarantees and borrower relationships
Data housed within the same system for reporting, providing a single source and version of “the truth”
Incorporating data easily into existing loan reporting requirements – a sustainable lending trial balance, sustainable lending profit/loss metrics, sustainable lending officer reports, etc.

All the evidence suggests that ESG is here to stay, and will continue to rise in importance. As we incorporate ESG concerns and processes more at the highest levels of M&A, marketing, production, and financial decisions, quality data around these initiatives will gain importance. Making sure, now, that you have the technology in place to provide quality data for ESG and all other activities and reporting requirements will save money and time later.

Dean Snyder

Mr. Snyder is responsible for overall strategic sales support efforts for AFS. In this role, he directs teams that manage product demonstrations and presentations, Discovery and Needs Assessment studies, industry research, and AFS marketing and communications. Mr. Snyder is responsible for oversight and guidance of the AFSVision® Advisory Council, a client-centric forum to help guide future AFSVision development and services. He also leads the AFSVision Capital Markets business team. Additionally, he is an executive sponsor for multiple client relationships, ensuring customer success and satisfaction. A member of the Executive Committee, Mr. Snyder works with the AFS CEO, Chairman, and the committee on strategy and execution for AFS.

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