In a previous article, we discussed the so-called “Green Banking”. We pointed out some of the areas where banks [can] offer "green" products. Today, we address the broader chapter of "sustainable finance" where the "green" dimension is only one out of three. The other two are the Social and Governance dimensions, which together with Environment create the sustainable investment matrix, also known as "ESG".
ESG contains risks and indicators. Our not - so - typical Business Risk Management system, E-ON RIBIA, has the required mechanisms and functions and incorporates best practices to recognize and address them.
But what are banks doing in managing these issues when considering funding requests? This is the issue we address in this article.
Traditional core banking systems, by default, do not have databases capable of capturing ESG-related data
We are well aware that traditional core banking systems, by default, do not have databases capable of capturing ESG-related data. Indicators, customer attributes, associated risks, etc. So, what is required? Where is the gap? Here are some areas that at E-ON INTEGRATION we have diagnosed and are working on:
At first glance, it takes reorganization of key databases to capture the current status of a potential client/investment. What information is required? How is it organized in "client records" of a typical system or other data structures?
In addition to documentation, a mechanism is needed to evaluate this data. For example, it is known that when one applies for finance, the procedure goes through some "scorecard" assessment to get the bank to assess the creditworthiness of the application. There may be other mechanisms besides the "scorecard". But none of them are able to assess more complex data such as ESG indicators, quantified risks and cost mitigation actions that may be involved.
Finally, during the lifetime of a finance project, the necessary history to confirm (or not) the viability of the investment financed is not available. This history may affect various related factors, such as the change in the approved Line of Credit or the Interest Rate.
No funding evaluation mechanism is able to estimate data such as ESG indicators, quantified risks and cost mitigation actions that may be involved.
E-ON can have an active role concerning the above actions at multiple levels:
It can provide consulting at the level of database reorganization.
It can propose external databases when the internal data held by banks are not sufficient to assess a situation with confidence. How, for example, will the risk of an investment being destroyed by climate change be assessed? On the basis of what climate data?
It can propose specific automatic financing appraisal solutions that complement (rather than replace) the bank's existing processes. For these solutions, E-ON RIBIA's specialised Risk Management product can be of assistance.
It can assist in the design of the reporting that such new products will require. For example, Pillar III