Banks are well behind in reaching their environmental, social and governance (ESG) goals, according to research from global IT services firm Avanade and financial industry body Efma.

Their report, entitled “Taking sustainability seriously: Are banks ready?”, highlights how banks and financial institutions are under increasing regulatory pressure to track and monitor their ESG progress.

Established in 2016, the Climate-related Financial Disclosures (TCFD) framework, developed by the Task Force, has become the global standard for climate disclosures.

In 2020, New Zealand became the first country to introduce a law requiring financial services firms to report the impact of climate change on their business. In the same year, the UK Financial Conduct Authority announced that all publicly listed UK companies with a premium listing would need to address TCFD requirements by 2023.

But the research found that only half of banks - 53 per cent - will be ready for regulatory reporting in the next six months, whereas almost one-in-five - 18 per cent - are still unclear as to what the requirements are, and 29 per cent said they will not be ready for “at least another year”.

A further 57 per cent of banks admitted they will not hit net carbon zero operations until 2025. Only 15 per cent stated they had already achieved this position, while just over a quarter - 26 per cent - said they will be carbon neutral in the next 12-24 months.

Only 25 per cent have a climate risk model ready now, and a third - 34 per cent - plan to be in that position in six months. The rest - 42 per cent - will not be able to test the impact of various climate scenarios for “at least a year”, with 12 per cent having to wait two years.

Data integration is the biggest challenge to climate risk analysis, with almost a third of banks - 32 per cent - struggling with the lack of integration of climate risk data with their risk management framework.

The overall tardiness around ESG progress comes despite the majority of banks - 70 per cent - seeing their ESG work as having a “positive impact” on their market reputation and credibility. This was the top benefit, followed by balance sheet protection - 50 per cent - attracting younger groups of consumers - 44 per cent - and better energy and waste management - 34 per cent.

Nic Merriman, European lead for financial services at Avanade, said: “Clearly some banks are struggling to get moving towards hitting their ESG goals. Whether it’s disclosure and reporting, having a climate risk model up and running, or making hard choices about whether and where to discontinue client business, there is still plenty to do.

“Integrating climate data with risk management frameworks is a major concern.”

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