BrazilFour financial services sustainability trends to watch in 2024
Sustainability continued to be a focal point for Europe’s financial services sector in 2023. But what’s in store for 2024? Jeroen Wiggers and Camila Herrera from FiSer Consulting share four sustainability trends to watch.
The year 2023 saw several regulations came into force, including the Corporate Sustainability Reporting Directive (CSRD) and the first set of the European Sustainability Reporting Standards (ESRS), broadening the scope of environmental and social information that companies must comply with.
With a historical agreement on transitioning away from fossil fuels reached during COP28, the coming year will be action-packed, involving developments such as net-zero intermediate targets, Scope 3 financed emissions, the rise of responsible investments and ESG compliance.
Net zero intermediate targets
With major financial institutions pledging to achieve net-zero greenhouse gas (GHG) emissions in lending and investment portfolios by 2050, an increasing focus from regulators and investors is credible, measurable, and actionable transition plans. Progress reports reveal gaps, especially in GHG-intensive sectors, such as power and oil, setting 2030 intermediate targets a 2024 priority.
Scope 3 financed emissions
Measurement of emissions in lending and investment portfolios is crucial for achieving net-zero intermediate targets. Approximately 97% of a financial institution's emissions are found in Scope 3, predominantly as financed emissions, categorized as 15 under the GHG Protocol.
The primary challenge faced by the European financial sector lies in data collection, with issues of unavailability or lagging reporting periods. Initial estimations can be facilitated through modelling tools and sector aggregation, using frameworks like the GHG Accounting and Reporting Standard for the Financial Industry, developed by the Partnership for Carbon Accounting Financials (PCAF).
Emerging areas such as facilitated emissions (from underwriting, securitization, and advisory) and Scope 4 (avoided) emissions are also anticipated to impact financial institutions.
Rise of responsible investments
In the transition to net zero, institutional investors are integrating ESG criteria into traditional analysis tools, driving the growth of responsible investments. Despite a lack of standardization, collaborative efforts by the Principles for Responsible Investment (PRI), the Global Sustainable Investment Alliance (GSIA), and the CFA Institute have harmonized terminology across five categories: Screening, ESG integration, Thematic investing, Stewardship, and Impact investing.
Impact investing is set to gain the most traction in 2024, facilitating increased capital allocation to address global challenges.
Sustainable bonds and loans play a vital role as responsible investments, guided by the International Capital Market Association (ICMA), the Loan Market Association (LMA), and the EU Green Bond Standards.
Although sustainable debt issuance has increased in recent years, a stabilization is expected in 2024 due to prevailing market conditions. Issuers can benefit by aligning with the latest guidelines, enhancing their Sustainable Finance Frameworks, and updating their Impact Reporting to respond quickly to investors’ demand when market conditions improve.
A key aspect of responsible investments is to prevent greenwashing practices. With climate change being a prevalent subject, initiatives like the latest SFDR consultation by the EU Commission, the proposed framework for ESG ratings providers by the European Securities and Markets Authority (ESMA), and the surge of systems to quantify, monitor and verify carbon removals certifications aim to enhance transparency and mitigate risks associated with misleading claims.
The year of ESG compliance
The sustainability regulatory landscape for financial institutions remains complex and continues to evolve. With stricter regulations and reporting requirements to come into effect, the European financial services sector will have to develop a strategic roadmap, including the integration of data management and a shift from climate to nature.
Some of the main priorities and developments that financial institutions need to monitor in 2024 to ensure compliance and a competitive position are:
Prepare to thrive
Financial institutions can overcome sustainability challenges by ensuring alignment with evolving industry trends and regulatory standards. Main elements to facilitate a seamless transition to the 2024 regulatory environment include assessing and adjusting goals, implementing regulatory requirements effectively, and achieving compliance with best practices.
A five-step systematic process can position market participants as competitive and responsive players:
1) Revise ambition and targets
Evaluate and benchmark sustainability goals against trends, stakeholder expectations, and peers' performance.
2) Gap analysis
Conduct a thorough analysis to identify areas for enhancement, mitigate risks, and ensure compliance.
3) Develop a strategic roadmap
Design a roadmap with clear steps, timelines, and resource requirements to achieve sustainability targets.
4) Engage stakeholders
Foster continuous engagement with all stakeholders, facilitating alignment with sustainability objectives.
5) Ongoing expert advice
Provide continuous consultation to navigate complexities, ensuring successful delivery and responsiveness.
Conclusion
European financial institutions will benefit from responding to evolving Sustainability demands in 2024. By seeking guidance to ensure compliance through tailored assessments and strategic support, organizations can navigate their business to mitigate risks, unlock new business opportunities and become more sustainable.
