Banks risk damaging customer relationships as they address climate data gap

As banks step up efforts to close climate data gaps, they risk adding a disproportionate burden on companies and harming customer relationships.

Scarcity of reliable data on clients' environmental impact and climate strategies is a key challenge for banks as they seek to execute their net-zero plans and meet intensifying regulatory requirements. Banks have so far relied heavily on proxies to estimate risks associated with climate change, which is driving significant dispersion and a likely underestimation of the risk, eurozone and U.K. climate stress tests found earlier this year.

In a recent survey by consultancy Accenture, only 26% of global bank executives said they were confident of the reliability and coverage of the data that underpins their net-zero key performance indicators.

"It's like the Wild West out there," Peter Beardshaw, global financial services sustainability lead at Accenture, said at the Sibos conference in October. "There's quite a big disparity in the sources of data, the coverage and lots of proxies are being used."

Banks are increasingly supplementing the work of third-party data providers by reaching out to customers to obtain information on elements such as greenhouse gas emissions, fossil fuel dependency, geographical location data, water consumption and energy performance certificates. But data collection is often poorly executed.

"Everyone in the bank seems to be sourcing their own [environmental, social and governance] data and it's not coordinated," one bank executive was quoted as saying by Accenture's research.

Banks have pockets of data coming from third-party vendors as well as various parts of the business, such as relationship managers, payments, retail and procurement, with teams asking the same customers for information through separate channels, Beardshaw said.

"You're dealing with an immense amount of data. But you're also dealing with different parts of the organization needing quite similar data for different purposes," said Gill Lofts, global financial services sustainable finance leader at EY.

The problem is even more acute for multi-banked companies. "We ask customers for information. And you start to get customers saying, 'I'm being asked by three different banks, and they have three different templates,'" said Solange Chamberlain, COO for commercial and institutional at NatWest Group PLC.

Experience from banks' anti-money laundering efforts shows that too many questionnaires and document requests can damage client relationships. In a survey of corporate treasurers in 2019, most said they had reduced or limited the number of banks they work with to minimize the burden of growing know-your-customer, or KYC, requirements in the wake of strengthened money laundering regulation. Many answered that KYC had negatively affected their banking relationships.

Companies that cannot afford to pay the additional costs of tracking and providing climate data, especially small and medium-sized enterprises and companies in emerging markets, will suffer the most, said Natasha Condon, global head of core trade at JPMorgan Chase & Co., at Sibos.

"It's incredibly important that when we design all these processes, we design them from scratch to be easy to comply with," Condon said. "We're going to have to come up with common standards for onboarding, shared data, and make it easy for these companies to supply standardized data."

Initiatives underway

New reporting standards coming through in the EU and U.K. will go some way to help banks obtain more standardized data on larger companies, Chamberlain said. In the EU, for example, the upcoming Corporate Sustainability Reporting Directive will from 2024 require large and listed businesses to report in more detail on sustainability issues.

Other industry initiatives are seeking to harmonize and ease climate data reporting for companies on a global basis. The International Sustainability Standards Board, for one, is working to create a "comprehensive global baseline of sustainability-related disclosure standards" to help investors and other capital market participants assess ESG-related risks and opportunities. Launched last year, the ISSB is part of the IFRS Foundation, which is responsible for setting global accounting standards.

Meanwhile, the Climate Data Steering Committee, formed by French President Emmanuel Macron and UN Special Envoy for Climate Ambition and Solutions Michael Bloomberg, recently released recommendations for the development of an open data utility for climate transition-related data. The utility will collect and aggregate net-zero climate transition data, focusing initially on emissions data across Scopes 1, 2 and 3, decarbonization targets and use of carbon credits, and data identifying the assurance and verification of disclosure. A beta pilot is anticipated to go live in the second half of 2023.

Technology and upskilling

While industry efforts may take time to materialize, there are other ways in which banks can address the climate data gap without disproportionately burdening customers.

Banks should look at automating data gathering where possible through new technology, said Chamberlain. They may also be able to better leverage information that is already being collected in their business and risk modeling units, said Alban Pyanet, a partner at Oliver Wyman who works with global banks on climate-related issues.

"There is typically more data than one might see," said Pyanet, speaking at a conference organized by S&P Global Sustainable1 in September. "Many of the institutions we've worked with ended up realizing they had more data than they thought."

Banks should consider updating their ESG data architecture, for example by building a centralized hub or a decentralized marketplace to capture all climate data within an organization, said Beardshaw. He also emphasized the importance of strengthening the link between the responsibilities of the chief data officer and the bank's overall net-zero strategy.

It is also important that banks help upskill their customers and guide them on what data will be required of them, so that they can start collecting the necessary information, said Marisa Drew, chief sustainability officer at Standard Chartered PLC.

"In many cases, the challenge really is that the data just doesn't fundamentally exist," Drew said at Sibos. "Companies don't track the data because they're early on the journey."

However the industry addresses the climate data challenge, the key for customers will be simplicity.

"You can't ask companies to measure 50 things," said Drew. "They've got to run their business. If we can identify and isolate the financially material things that really matter by industry, that's the way to go."