The decisions that financial services firms make on investment and credit provision will be central to the global drive for sustainability. That is why regulators are putting in place onerous environmental, social and governance (ESG) data collection and disclosure requirements for financial institutions (FIs): Sustainable firms could attract more capital, and on more favourable terms, than unsustainable firms, a new study says.
According to the ‘Sustainability reporting for banks: the climb starts here’ by the London Institute of Banking & Finance Mena, while the organisational requirements of collecting the number of distinct data points required for sustainability reporting may seem overwhelming, the way in which all firms conduct their business will, nonetheless, fundamentally change. “That is why effort and resource must be directed at ESG reporting. It will not only prove beneficial to the firm, it will soon be a requirement of doing business, on the same footing as financial reporting,” the white paper, written by Emmanuel Rondeau and Rutang Thanawalla, said.
The landscape for sustainability reporting is currently fragmented, the white paper showed. Different jurisdictions have different aims and are adopting different standards, with different timelines for reporting. Different reporting standards have different priorities. . Firms that are in scope in multiple jurisdictions need to produce a range of sustainability reports that meet those various timelines.
As the value chains of FIs and corporates naturally overlap, securing the right data and, hence, moving the dial on the quality of sustainability reporting will be a challenge for FIs.
In the Middle East and North Africa (Mena) region, after two successive COP summits, sustainability is in the regulatory spotlight. Research by EY finds that the majority of banks in Mena have introduced ESG strategies, though few have yet to put in place ESG KPIs.
When it comes to regulation, a number of ESG guidelines, metrics, and disclosure requirements have been introduced. In the interests of standardisation, in January 2023, the GCC Exchanges Committee introduced the Unified ESG Metrics for GCC listed companies. However, those rules are voluntary and did not replace any mandatory guidelines already in place.
Mandatory ESG reporting rules for listed companies in Mena include those implemented by the Securities and Commodities Authority (SCA) in the UAE, which introduced a requirement for companies to publish an annual sustainability report in 2020. Abu Dhabi Global Market’s (ADGM) environment, social and governance disclosures framework came into force in June 2023. That is intended to boost the growth of sustainable finance and the green economy in the UAE, and it allows firms to select “a globally recognised disclosure standard that aligns with [their] business”.
All GCC regulators are now on track to review or set their ESG reporting requirements. The most widely-followed standards in the region are those of the Global Reporting Initiative (GRI), which were updated in 2023. The GCC Exchanges Committee ESG metrics are aligned with, among others, GRI rules.
There are two major questions for firms in Mena as things stand. First, whether the approach taken by ADGM is one that the region overall will follow and, second, if it is, which ‘globally recognised disclosure standard’ businesses should select.
Good ESG reporting will be a vital risk management tool, the report stresses. “It gives an FI precious information about how clients and its value chain are reacting to environmental and social changes and expectations. AI-based solutions are being leveraged to offer comprehensive, integrated and automated sustainability management. Even when significant upfront investment is required, automation can help drive cost efficiencies. Just as importantly, it enables FIs to have structured and periodic conversations with their stakeholders about their respective environmental and social impacts,” the white paper said.
FIs should carve out a strategy for efficient multi-jurisdiction ESG reporting, the white paper recommended. “Given that there are different sustainability reporting frameworks, and harmonisation may take a few years, FIs active across borders may have to report similar ESG information in different ways. The best way to avoid duplication of effort is to speak to peers, be involved with industry and trade bodies, and identify best practice for the institution’s own size and jurisdictions. Waiting for regulatory convergence is not an option,” it said.