The global push for sustainability is driving financial services firms to make crucial decisions regarding investment and credit provision. Regulators are imposing strict environmental, social, and governance (ESG) data collection and disclosure requirements on financial institutions (FIs) in order to promote sustainability. Sustainable firms may have an advantage in attracting capital and securing favorable terms compared to unsustainable firms, a new study suggests.
In a white paper titled ‘Sustainability reporting for banks: the climb starts here’ by the London Institute of Banking & Finance Mena, it is emphasized that the organizational requirements for collecting the necessary data for sustainability reporting may seem overwhelming. However, the way firms conduct their business will fundamentally change in the future, and effort should be directed towards ESG reporting. Soon, ESG reporting will be a requirement for doing business alongside financial reporting.
The landscape for sustainability reporting is currently fragmented, with different jurisdictions having different standards and timelines for reporting. Firms operating in multiple jurisdictions will have to produce various sustainability reports to meet these requirements. Securing the right data and improving the quality of sustainability reporting will be a challenge for FIs as their value chains overlap with those of corporates.
In the Middle East and North Africa (Mena) region, sustainability has come under regulatory focus after two consecutive COP summits. While many banks in the region have introduced ESG strategies, few have implemented ESG Key Performance Indicators (KPIs) so far. Various ESG guidelines, metrics, and disclosure requirements have been introduced to promote sustainability, including the Unified ESG Metrics for GCC listed companies introduced by the GCC Exchanges Committee.
Mandatory ESG reporting rules have been implemented for listed companies in Mena, such as the requirement for annual sustainability reports by the Securities and Commodities Authority (SCA) in the UAE. Additionally, Abu Dhabi Global Market (ADGM) has introduced an environment, social, and governance disclosures framework to boost sustainable finance and the green economy in the UAE. GCC regulators are reviewing or setting their own ESG reporting requirements, with many following the Global Reporting Initiative (GRI) standards.
Effective ESG reporting is seen as a crucial risk management tool for FIs, offering valuable information on how clients and the value chain are affected by environmental and social changes. AI-based solutions are being used to provide integrated and automated sustainability management, helping to drive cost efficiencies. FIs are urged to develop a strategy for efficient multi-jurisdiction ESG reporting, as different reporting frameworks and lack of harmonization may require reporting similar ESG information in different ways.
In conclusion, the shift towards sustainable practices in the financial services industry is becoming increasingly important, as sustainable firms may stand to benefit from attracting capital on better terms. FIs need to prioritize ESG reporting, navigate the fragmented landscape of sustainability reporting requirements, and leverage automation and AI solutions for efficient and effective sustainability management. Compliance with ESG guidelines and regulations will not only benefit the firms themselves but also contribute towards the global drive for sustainability and responsible investing.
