Maria Patschke, CEO of SAP Fioneer ESG Solutions shares her insights ahead of Climate Risk USA

Portfolio and single asset data challenges in ESG

Maria Patschke, CEOSAP Fioneer ESG Solutions

Below is an insight into what can be expected from Maria’s session at Climate Risk USA 2023.

The views and opinions expressed in this article are those of the thought leader as an individual, and are not attributed to CeFPro or any particular organization.

What are the biggest challenges financial institutions are seeing when overcoming portfolio and single asset data within ESG?

An escalating array of ESG regulations characterizes the contemporary landscape for financial institutions. These regulations and other challenges span from the incorporation of ESG KPIs into operations (risk & pricing) to the intricate task of portfolio reporting. The crux of these efforts is the acquisition and management of diverse ESG datasets, both internal and external, coupled with intricate calculations.

As trusted advisors to their customers, Financial Institutions are uniquely positioned to meet stakeholder demands and serve customers to enable their transitions. Amidst the diversity of approaches, a shared imperative emerges, the need for heightened transparency and unwavering credibility. A labyrinth of obstacles, including data availability, reliance on manual interventions, and the absence of well-defined (calculation) standards, necessitate deft navigation. Furthermore, the accelerated evolution of ESG regulations piles on the pressure for financial institutions to take proactive measures. This unrelenting pace of change underscores the urgency for banks to respond nimbly and strategically to these evolving demands.

How can financial institutions begin to record and report their ESG KPIs across portfolios?

Software solutions empower financial institutions with an unparalleled scaling of ESG data across the entire organization. The basis of effective data orchestration lies in extracting profound insights from existing as well as elusive data, ensuring that no potential value is left untapped. Modern Software can help extract meaningful insights from existing or missing data, i.e., calculating missing data and providing a complete set of KPIs that are essential in the ESG world, delivering them to different departments such as risk management, accounting & controlling, steering, and reporting. A pivotal aspect is the provision of a unified, centralized data and calculation platform that captures and calculates ESG-related data and effectively manages, reviews, and securely stores this critical information interconnected between departments. That enables a variety of use cases, ranging from quantifying financed emissions to ensuring precise taxonomy alignment and evaluating potential physical risks.

This holistic approach ensures that financial institutions have complete control and visibility over their ESG-related portfolio data, fostering a proactive and robust approach towards ESG integration. Financial institutions should leverage the power of software without upheaval, aligning effortlessly with their established technological landscape. An integrated setup magnifies the capacity of financial institutions to navigate the intricacies of ESG seamlessly and effectively.

Where are data gaps predominantly emerging? How can we look to bridge these?

For big and listed corporates ESG data started to become available via external data sources that track reported ESG data. For small and mid-caps, projects and real estate this remains a challenge. For those loans & investments financial institutions often struggle to find reliable ESG data, making it a persistent challenge. Addressing this issue demands a comprehensive evaluation of your existing ESG data processes.

Within the landscape of ESG data management, software can confront a dual challenge of scarcity and fragmentation. ESG data is frequently dispersed across various departments and diverse sources. Data is handled often via manual workarounds without standardization.

However, data limitations should not hinder progress. Data gaps can be closed by a central ESG data marketplace providing data from data vendors and aggregators as well as from publicly available statistical data. An intelligent matching algorithm including exact and fuzzy matching already completes part of the missing data. The remainder can be calculated using proxies.

Calculations should follow best practice frameworks. E.g., for Financed Emissions financial institutions can leverage the power of the internationally recognized Partnership for Carbon Accounting (“PCAF”). This strategic alignment with internationally accepted standards not only enhances the reliability of results but also establishes a bedrock for transparency and trust. Closing ESG data gaps for financial institutions is crucial for making informed investment decisions, managing risk, and aligning with sustainability goals.

Are institutions aligned in the way they are managing, calculating, and evaluating single exposure ESG KPIs? What does best practice look like?

In the realm of managing, calculating, and evaluating single exposure ESG KPIs there exists a discernible diversity of approaches among institutions. For Financed Emissions the PCAF framework provides best practice Financed Emissions calculation, ensuring consistency and comparability. Already 400+ financial institutions worldwide equaling USD 93+ tn assets became a member and therefore voluntarily committed to reporting Financed Emissions, independent from regulations that might force them to do so. While some common threads and shared principles emerge, the alignment is far from uniform. ESG practices and standards are still evolving, and as a result, financial institutions often exhibit variations in how they handle single exposure ESG KPIs. Factors contributing to this lack of uniformity include differences in institutional priorities, stakeholder expectations, regulatory landscapes, available data sources, regions and asset classes.

Nevertheless, as the ESG ecosystem matures and standards become more established, we can reasonably anticipate a future trend towards greater alignment and coherence in the industry. This evolution promises a more robust and standardized approach to assessing and managing ESG-related risks and opportunities across the financial sector, ultimately enhancing transparency and decision-making for all stakeholders.