As the real economy transitions to net zero, banks have to manage the associated risks and adjust their business models as necessary. For example, they might embed transition considerations into their governance and risk management frameworks and support their clients by providing advisory services and transition financing. In the process, banks face numerous challenges around data availability and quality, harmonisation of taxonomies and scenario analysis. Examples of problem statements include:
Some banks still primarily rely on a manual approach for tracking their net-zero progress, which is administratively burdensome and prone to human errors. How can a bank monitor and benchmark its progress towards net-zero in a cost-effective and efficient manner?
A bank’s transition planning process is dependent on its clients’ transition pathways. However, information on clients’ emissions or transition plans is often lacking. Also, some banks conduct surveys of clients in a manual or administratively burdensome manner. How can technology be leveraged to facilitate the collection of information about clients’ emissions or transition plans and the analysis on clients’ transition progress in relation to the bank’s own target?
Scenario analysis is a key tool in transition planning, including in developing a transition strategy, setting targets and tracking progress. Yet, off-the-shelf scenarios might not be directly applicable to the region a bank operates in or to the bank’s business needs. How can technology facilitate the building of comparable scenarios that cater to a bank’s own context and needs?
2. Climate Risk Management
To meet supervisory expectations, banks are increasingly looking to assess and manage physical risk and transition risk. This is a challenging task due to the forward-looking nature and long time horizon of climate risk. Data is often unavailable and inconsistent, methodologies are not yet mature and uncertainty exists in the science of climate change (e.g. tipping points). Examples of problem statements include:
Regional constraints in data collection may lead to data inconsistency. For example, some jurisdictions are slower in adopting climate-related disclosure regulations, or their regulations are not aligned with well-recognised standards. For internationally active banks, it can be difficult to translate regional data into a common, standardised format. How can technology assist banks in their internal processes of transforming and cleaning data collected from different regions?
Climate-related data and emissions data on SMEs are often lacking, given that SMEs are not subject to regulatory disclosures and lack the resources to collect data. Also, SMEs do not usually have any carbon inventory baseline or tools in place to track their climate performance. How can technology improve data availability on SMEs and facilitate banks’ access to such data?
Processing data for climate risk assessment is often labour-intensive and time-consuming. For example, information contained in the sustainability reports of listed companies is often unstructured and scattered across different parts of the reports. It takes time for banks to extract and clean the data to make it useful for the bank’s own climate risk assessment model. How can technology facilitate data collection and processing for banks’ carrying out of climate risk assessment?
Traditional risk management tools are often inadequate for climate risk assessment. For example, Excel-based tools cannot incorporate geospatial data. How can technology help create risk management tools that are suitable for climate risk assessment and management?
3. Green and Sustainable Finance
To meet investor demand and support clients’ green or transition projects, banks offer green and sustainable investment products and financing. In the process, banks have to balance several objectives – ensure compliance with financial regulations, avoid greenwashing and seek commercial returns. Examples of problem statements include:
Standards and regulations relating to green and sustainable finance are varied and evolving. Different jurisdictions have different regulations about the green labelling of investment products and different taxonomies for green or transition activities. It is difficult for banks to monitor compliance, and there could be greenwashing risks if banks offer products that are not aligned with the latest regulations or taxonomies. How can technology make it easier for banks to ensure compliance with different standards, regulations and taxonomies?
There are growing concerns over greenwashing risks. The lack of historical data on non-listed companies poses a challenge for banks in tracking borrowers’ climate performance. Consequently, it is difficult for banks to ensure alignment with green finance objectives and monitor the progress of clients’ green or transition projects. How can banks track key performance indicators and sustainability performance targets set during the project initiation stage or in green and sustainable finance products so as to reduce the risk of greenwashing by clients?
SMEs are not incentivised to obtain green financing because of the high cost, lack of understanding of climate risk and lack of regulatory requirements. How to improve SMEs’ knowledge of green financing options and lower the cost of SMEs to obtain green financing?
Before approving financing to low-carbon technology firms, banks have to understand and assess the potential of the technology, such as the scientific soundness and commercial viability. Not only does this take the banks time and efforts, but it also makes it difficult, time-consuming and costly for the firms to secure funding. How to facilitate banks’ assessment of low-carbon technologies and connect banks with borrowers that are developing technologies with good technical and commercial potential?
4. Sustainability/Climate-related Disclosure and Reporting
To maintain transparency and comply with regulations, banks have to make disclosures that are in line with recognised standards and frameworks. Banks face a number of challenges such as data governance and management. It is also difficult for them to collect high quality data from clients, particularly SMEs and non-listed companies which are not subject to disclosure regulations and often do not have the resources to collect data. Examples of problem statements include:
Disclosure requirements and standards are evolving and it is time-consuming and labour-intensive for banks to identify discrepancies between the existing reporting process and the latest requirements or regulations. How can technology facilitate the mapping of disclosure requirements and assist banks in making the necessary adjustments to its existing reporting processes?
Even if SMEs are willing to collect emissions data, they often lack the resources and expertise to make disclosures that are in line with recognised standards. How to help SMEs navigate the complexities of sustainability or climate reporting and meet the requirements of recognised frameworks, so as to facilitate banks’ collection and compilation of data?
Reporting under nature-related frameworks (e.g. the Taskforce on Nature-related Financial Disclosures framework) requires various types of nature-related data such as biodiversity impact. It is difficult for banks to obtain high quality nature-related data for fulfilling the reporting requirements. How can technology assist banks in collecting, processing or reporting nature-related data?