By Dory Weiss, Head of Sustainability and ESG, nCino
As we mark Earth Day 2022 and reflect on our collective global journey toward a sustainable future, we should not underestimate the power of financial institutions to drive environmental and social change.
“Invest in Our Planet” is the theme of this year’s Earth Day, so today I want to discuss how financial institutions can mobilise finance in the direction of environment, social, and governance (ESG) investments.
At the time of the first Earth Day in 1970, the idea that finance should be harnessed to achieve environmental and social progress was far from peoples’ minds. Now, more than 50 years later, finance is key to our ability to transition to a sustainable future, and investors and financial institutions have committed significant amounts of capital to sustainable and responsible practices. More than 2,250 money managers, collectively overseeing $80 trillion in assets, have signed on to the United Nations-backed Principles for Responsible Investment, while banks have already committed $47 trillion dollars to sustainable financing through the Principles for Responsible Banking.
Despite the current wave of awareness and commitment, it is not yet enough to enact change on the scale we need. The latest Intergovernmental Panel on Climate Change (IPCC) report on the mitigation of climate change estimates that it will take $1.6 – $3.6 trillion dollars of annual investment over the next ten years to limit the most disastrous effects of climate change. Financial institutions have a crucial role to play. What we need now is the acceleration and deepening of action to deliver the transformation in financial practices and an alignment around policy, data, and technology.
The Role of Regulation
Thoughtful government regulation is needed to embed sustainability into lending, investment, and underwriting decisions. In the last two years a growing number of countries have proposed or enacted regulations ranging from mandatory disclosures to ESG stress tests to requirements focused on sustainable loan origination and portfolio monitoring.
One early example that policymakers are enacting is the EU’s Sustainable Finance Action Plan (SFAP). In order to support the European Green Deal, the SFAP provides a set of tools and resources, including the EU Taxonomy regulation, for banks, insurers, and asset managers across the EU. The intention is to divert more capital towards sustainable investments, include sustainability risk in decision making, and orient mindset towards the long term.
Two other countries currently leading the way are the United Kingdom and Germany. In the UK the Green Technical Advisory Group (GTAG) is introducing a “green taxonomy” to tackle greenwashing and make it easier for investors and consumers to understand how a firm is impacting the environment, while the German regulator BaFin has released a draft regulation requiring banks to focus 75% of their lending portfolio on sustainable companies.
The landscape is shifting rapidly, and it can be difficult to navigate the various reporting frameworks and taxonomies that are emerging. Globally, reporting on sustainability is still largely optional, but that won’t be true for long – policymakers have already set near term dates for reporting to be mandatory in Europe, US, and Canada. Once policy makes this compulsory, businesses will have to provide accurate data, which is crucial for sustainable finance to grow.
Data is Key
To save our most scarce resources, we will need to use our most plentiful resource—data. Data is the backbone of digital climate finance platforms, and access to high-quality, comparable ESG data is vital to increase opportunities for sustainable finance. Data sets the benchmarks for climate finance decision making, improves intelligent processes and standardisation, increases trust and transparency, reduces duplication, and provides the crucial security and auditability we need for enhanced reporting.
Since there is no set journey for institutions as they begin recording, reporting, and taking action on ESG-related data, they have struggled to understand what data is available and relevant and how that data should be captured. Understanding this is essential for firms–not only to guide internal ESG efforts, but to ensure transparency with external stakeholders. Technological solutions like the nCino platform can help organisations gain a clear picture.
The nCino platform is predicated on solving the current and evolving needs for financial institutions via a single, highly configurable platform—ensuring speed, transparency, and the agility necessary to pivot for regulatory compliance. Financial institutions of all sizes are investing in technology to implement ESG strategies, and nCino is investing to extend our natively cloud-based platform to embed sustainability into the lending lifecycle. nCino can help address the short and long term needs of credit providers who want to embrace ESG standards within their lending practices. Given the flexibility of our solution, we can enhance a financial institution’s existing processes to capture ESG attributes and bring risk tools and decisioning criteria into the same platform used for traditional lending. Of course, integrating this information efficiently into the lifecycle will increase the ability of FIs to have meaningful conversations with customers about sustainability risk, recommendations for improvement, and enhance engagement and the value delivered to customers.
As we look to the future of financial services and seek ways to “Invest in Our Planet,” nCino is committed to supporting our customers and helping them achieve their sustainability goals.