Sustainability has become a vital priority in financial services, as we are witnessing a shift towards mandatory environmental, social and governance (ESG) disclosures. A notable example of this trend is the Net Zero Asset Owner Alliance, a coalition of global asset owners committed to decarbonising their portfolios and achieving net zero emissions by 2050.
There is a diverse market for sustainable finance that can support various initiatives, such as financing companies that help install solar panels, make electric cars or invest in businesses that build greener buildings.
Although sustainability-linked loans (SLLs), for instance, have reached significant peaks in terms of volumes in recent years, the appetite has slowly declined due to fears of greenwashing and very rigorous structures. SLLs provide borrowers with lower interest rates if they achieve specific ESG goals, but many borrowers are reluctant to disclose their ESG targets to the market.
On the other hand, other sustainable finance products, such as green bonds, are gaining traction. However, these products face barriers to growth due to the lack of consistent standards across the market, the difficulty of accessing reliable data, and the fear of greenwashing. Financial institutions must overcome these challenges by integrating data and automating processes to seize the ESG opportunity.
Regulation is paving the way to a greener future.
The world is witnessing a global race to achieve net zero, and various countries have made commitments. In 2021, Bahrain and Saudi Arabia officially announced their plans to achieve net zero emissions by 2060, while Oman and the UAE have set even more ambitious targets by aiming to reach net zero by 2050.
In the UAE, we are witnessing a transformational shift. In 2022, the Securities and Commodities Authority (SCA) made it mandatory for listed public joint stock companies to report on ESG, a significant step in promoting transparency and accountability. Moreover, at the end of 2023, during the COP28 summit, UAE’s President, HH Sheikh Mohamed bin Zayed al-Nahyan, announced a $30 billion pledge to fund clean energy and other climate projects globally. The UAE’s decision to extend the 2023 Year of Sustainability into 2024 is a bold declaration of its green intentions and an affirmation of its commitment to sustainability.
Looking more broadly, the EY ESG MENA Bank Tracker report revealed that 75% of MENA banks have integrated ESG strategies into their operations. Concurrently, those banks are also ahead in providing sustainable offerings. More precisely, 70% of banks lend to renewable energy projects, 65% issue green, social or sustainability bonds, and 40% offer sustainability-linked loans.
Consumers are increasingly interested in sustainable companies and products. In fact, a survey conducted by Bain & Company and the World Economic Forum revealed that consumers expect governments and companies to take the lead on climate change. As companies start to embed ESG into their strategies, we will see a greater focus on governance, harmonisation, and investments in innovation. Regulation is an important driver, and we can only expect regulation to intensify in the region.
ESG reporting
ESG reporting provides an extraordinary competitive advantage for corporates, fintechs, and financial institutions. However, it also poses several challenges. As mentioned, a significant obstacle is the lack of structured and reliable data. According to a study published by EY, ESG data is usually dispersed in various applications or databases, and 55% of respondents revealed that data is generally stored in spreadsheets. Concurrently, manual processes are time-consuming, costly and more susceptible to errors or risks.
Given the growing need for high-quality disclosures, companies and financial institutions must tackle reporting by switching from manual to automated processes. New technologies, such as Generative AI (Gen AI), hold transformative potential and can help financial institutions harness data, streamline processes, and provide a seamless experience for customers. Gen AI can extract data from siloed IT systems, analyse it, and turn it into meaningful and accessible insights.
Gen AI holds great promise, and the State of The Nation Report conducted by Finastra shone a light on its role in ESG reporting. More precisely, 36% of respondents want to leverage Gen AI to collect, process and analyse data for ESG criteria classifications and decision-making. Once financial institutions have access to accurate data, they can enhance their reporting processes and, when it comes to SLLs, assess a customer’s situation, streamline the lending process, and adjust the terms and risk management accordingly.
Partnering with fintechs enables banks to leverage innovative technologies and ecosystems that allow information to be easily shared and KPIs to be tracked while ensuring compliance with upcoming regulations. Banks can access up-to-date data sources that help them tailor their lending services to corporate customers via open APIs.
According to the survey, most financial institutions (85%) believe it is essential for financial services to support ESG initiatives and actively seek to improve in this space. Green lending is perceived as an opportunity for growth and revenue generation by 82% of respondents. Therefore, the time is now – financial institutions have a fantastic opportunity to define a robust ESG strategy, harmonise and democratise data, leverage best-in-class solutions, and gain a competitive edge.
