As North American financial institutions prepare for mandatory climate disclosures under the proposed SEC Rule, OSFI Guideline B-15, ISSB and CSRD, the need for accurate and reliable climate and environmental data in loan and investment portfolios has become critical. However, many organizations face significant challenges, including inconsistent data quality, fragmented sources, and limited access to comprehensive third-party information. These hurdles make it difficult to produce reliable sustainability reports that meet regulatory requirements and generate actionable insights.
One of the biggest challenges is the decentralized and scattered nature of financial and non-financial data across various systems. Without a clear strategy for integrating and managing this data, financial institutions struggle to produce robust and reliable reports. To make matters worse, external data providers often supply fragmented and inconsistent information, further complicating efforts to deliver reliable disclosures.
In addition, financial institutions must continuously strive to improve data quality to avoid the risk of greenwashing and ensure decision-useful data. Many initially rely on industry proxies (e.g., to calculate financed emissions), which are sufficient for early disclosures but do not allow for granular assessments of individual companies or assets that may need financial support for a successful transition. This generalized approach treats all companies within a sector the same, neglecting the specific needs of each.
To enhance data quality, financial institutions must begin collecting additional non-financial data, either from external vendors or directly from customers. This data-driven approach, combined with a robust data governance framework, can streamline non-financial reporting and improve overall data reliability. By adopting centralized data management and adhering to industry-standard practices, institutions can improve both the efficiency and accuracy of their ESG reporting. Below are six critical steps they should follow to ensure compliance and enhance reporting accuracy.
Step 1: Set Sustainability Key Performance Indicators (KPIs) and Aspirations
The first step is to define clear Sustainability KPIs that align with the organization’s broader business objectives. This involves understanding both internal and external use cases as well as identifying which KPIs are most relevant to the business. For example, a financial institution heavily exposed to the real estate sector might aim to conduct bottom-up, location-based physical risk assessments of all its real estate collateral to mitigate chronic and acute risks. In contrast, institutions with substantial exposure to high-emitting sectors may focus more on gathering accurate counterparty emissions data and transition plans. Establishing KPI ambitions early in the process enables organizations to close data gaps more quickly, track progress effectively, and make informed, data-driven decisions.
Step 2: Retrieve Internal Data
Financial institutions should next identify the required internal data points, data owners, and relevant systems to gather the necessary information. This typically includes master and financial data on counterparties and collateral, as well as exposure data at the financial contract level from core banking systems and central risk and finance data warehouses. Internal data forms the foundation of sustainability reporting, so ensuring its granularity, accuracy, and completeness is crucial for maintaining consistency between financial and non-financial reporting. At this stage, identifying and closing data gaps is essential for achieving audit-grade disclosures.
To support this process, having a robust sustainability engine is key. The engine should be scalable and provide a structured approach to managing the methods and models associated with individual KPIs. A streamlined data model, built from all ingested data, enables more accurate reporting and improves decision-making. As ESG requirements evolve, the engine must adapt to accommodate new data and metrics.
Step 3: Source External Data to Address Gaps
To calculate Sustainability KPIs for the loan and investment portfolio, internal data must be enriched with external, non-financial data. This comprises both statistical data such as emission factors that can often be obtained from open-source databases and reported data from third-party providers. Through ESG data marketplaces, institutions can access various environmental, social, and governance datasets. However, selecting reliable vendors per KPI is critical, as the quality and relevance of this data can significantly impact reporting.
Step 4: Orchestrate and Calculate KPIs
Once data from internal and external sources is collected, institutions must integrate it into a cohesive framework for calculating KPIs. This step ensures the data is properly organized and analyzed to generate accurate metrics. Organizations may also identify additional data points to refine KPI calculations, ensuring that results reflect real-time performance.
Automating this process requires tools to manage data integration, perform complex calculations, provide a harmonized sustainability data model, and help identify and address errors in ingested data. Access to diverse data sources, including direct connectivity to third-party data vendors, helps to continuously improve data quality and generate business value beyond creating stakeholder transparency.
Step 5: Request additional data and engage with customers
To generate business value beyond reporting and position themselves as transition partners to their customers, organizations may choose to enrich their datasets by gathering additional information directly from those customers. Surveys or questionnaires designed to capture sustainability-specific data can help fill any remaining gaps. Prioritizing customer data collection based on the defined KPIs can be a useful avenue to enhance the accuracy of reporting and make real progress on both individual and customer targets through providing financing and advice.
Step 6: Evaluate and Align Sustainability KPIs
The final step is to evaluate the calculated KPIs against the organization’s sustainability goals and regulatory frameworks. Continuous monitoring and reviewing of these KPIs ensures that institutions remain aligned with their long-term ESG objectives and can adapt to changes in the regulatory landscape.
The Path Forward: Building a Strong ESG Framework
Accurate and reliable ESG reporting is complex, but financial institutions play a critical role in driving the transition to a sustainable economy. By implementing robust data governance, adopting scalable and modular tools, and following a structured ESG data management process, institutions can overcome fragmented data challenges and enhance the quality of their reporting. As regulatory requirements evolve and sustainability takes center stage, organizations that invest in a comprehensive sustainability strategy will be well-positioned to meet compliance demands and seize new growth opportunities in the sustainability space.
To find out more about our ESG KPI Engine, contact one of our experts.