Industry
Banking
Banking Services Transformation: Unlocking Exponential Value
Solution
TCS BaNCS™
TCS BaNCS™: Enabling Transformation in Banks and Financial Institutions
Highlights
- This article provides a comprehensive guide to designing a 360-degree environmental, social, and governance (ESG) dashboard for a bank’s lending portfolio. It emphasizes the importance of comprehensive tracking, visualization, and integration tools.
- It outlines the critical ESG factors- environmental, social, and governance, that banks should track, including carbon emissions, community impact, and corporate governance scores.
- Additionally, it highlights the necessity of integrating the ESG platform with internal and external systems and data sources to improve ESG-related decision-making.
On this article
On this articleinpage
ESG dashboard
Designing an ESG dashboard for a bank's lending portfolio focuses on evaluating how ESG factors are integrated into the bank's loan book. This dashboard will track how the bank's lending activities align with sustainability goals, providing insights into the ESG risks and opportunities associated with borrowers and loan types.
Key metrics
Key metrics for the ESG dashboard (Lending portfolio) are as follows:
Environmental factors (E)
- Green loans proportion: Percentage of loans issued for environment-friendly projects (e.g., renewable energy, sustainable agriculture).
- Carbon emissions of borrowers: Aggregate carbon footprint of the companies or individuals being financed.
- Energy efficiency loan exposure: Total loan exposure to energy-efficient projects, such as green buildings or retrofitting.
- Transition finance: Loans supporting industries transitioning from high-carbon to low-carbon models (e.g., traditional energy companies investing in renewables).
Social Factors (S)
- Social impact loans: Percentage of loans aimed at projects with a positive social impact, such as affordable housing, education, or healthcare.
- Diversity and inclusion loans: Portion of the loan portfolio directed towards minority-owned or women-owned businesses.
- Financial inclusion: Loans issued to underserved or marginalized communities (e.g., microfinance, SME loans in developing regions).
- Community development loans: Lending towards projects that benefit local communities (e.g., infrastructure, healthcare).
Governance Factors (G)
- ESG-rated borrowers: Percentage of borrowers with an ESG rating or compliance score.
- Governance risk of borrowers: The governance risk profile of borrowers, including measures of board diversity, corruption risks, and transparency.
- ESG compliance and reporting: Under loan covenants, some borrowers are required to report on ESG performance.
- Sustainability-linked loans: Loans with interest rates or covenants tied to the borrower's ESG performance targets.
Dashboard components
Key components to consider for designing an efficient ESG dashboard are as follows:
Overview Section
- Total lending portfolio: Overview of the bank's total loan book, broken down by ESG-compliant vs. non-ESG-compliant loans.
- Percentage of ESG-linked loans: A visual breakdown of the loan portfolio showing the proportion of loans tied to ESG principles.
- ESG risk rating: An aggregate ESG risk score for the lending portfolio based on third-party ESG ratings for borrowers and projects (e.g., MSCI, Sustainalytics).
Environmental Metrics
Green loan exposure:
- Total value of loans issued for environmentally sustainable projects.
- A breakdown by sector (e.g., renewable energy, sustainable agriculture, green buildings).
Carbon footprint of loan book:
- A heat map showing the carbon emissions of borrowers across different industries
- A comparison of high-emission vs. low-emission sectors within the loan book.
Loans for energy efficiency:
- Exposure to loans financing energy-efficient projects or retrofitting of buildings.
- Year-over-year growth in green lending initiatives.
Social metrics
Social impact loans:
- Total value of loans issued for social impact projects (e.g., affordable housing, education, healthcare).
- Geographic distribution of social impact loans to measure how lending supports local communities.
Diversity and inclusion lending:
- Amount of lending directed to minority- and women-owned businesses.
- Breakdown of industries or sectors receiving diversity-related loans.
Financial inclusion:
- Loans issued to underserved populations or low-income borrowers.
- Special focus on microfinance, SME lending, and community-based projects.
Community development loans:
- Total value of loans supporting community infrastructure or services.
- Impact metrics showing improvements in local economies or living conditions.
Governance metrics
ESG ratings of borrowers:
- Proportion of the loan portfolio made up of borrowers with formal ESG ratings or compliance mechanisms.
- A distribution chart showing borrower governance scores (e.g., board diversity, anti-corruption measures).
Sustainability-linked loan exposure:
Percentage of loans that include ESG performance-linked covenants (e.g., interest rate reductions based on ESG improvemts).
Governance risk profile:
A governance risk map showing which borrowers are considered high, medium, or low risk based on governance factors (e.g., regulatory compliance, corporate governance quality).
ESG reporting:
- The percentage of borrowers required to report on their ESG performance.
- Visual tracking of borrower compliance with ESG reporting requirements.
Performance tracking and trends
- Growth of ESG loans: A trend line showing the growth of ESG-linked loans over time, by category (e.g., green, social, governance).\
- Carbon reduction trends: A visual representation of how the carbon footprint of the loan portfolio has decreased or increased based on lending practices.
- ESG impact on risk ratings: A correlation chart showing how ESG compliance has influenced borrower creditworthiness or risk scores.
- Loan portfolio ESG scorecard: A unified ESG scorecard aggregating key metrics into a single rating for the overall loan portfolio, tracking progress over time.
Risk management and compliance
- ESG risk monitoring: Heat maps and risk alerts for high ESG-risk loans or sectors (e.g., industries with high carbon emissions or poor governance practices).
- Climate risk stress testing: Results from stress tests that simulate the impact of climate risks on the loan portfolio (e.g., how a borrower’s financials might be impacted by new environmental regulations).=
- Loan covenants linked to ESG: This section tracks the number of loans that include ESG-linked covenants or performance triggers, helping the bank in monitoring borrower compliances and potential risks.
Sustainability reports and audits
- Third-party ESG audits: Results from independent audits of the loan portfolio’s ESG credentials.
- Borrower ESG reporting: A section that collects and displays borrower ESG reports, ensuring transparency and accountability.
- Regulatory compliance: A tracker for regulatory compliance, showing how ESG-related regulations (e.g., disclosure requirements) are being adhered to across the loan book.
Visualization tools
The listed tools below enable easy and effective visualization of metrics, supporting faster and more informed decision-making.
- Pie/Bar charts: To show the breakdown of loans by ESG category (green loans, social impact loans, etc.).
- Heat maps: To visualize carbon emissions across different sectors in the loan portfolio, or for showing governance risk across borrowers.
- Trend lines: To track the growth of ESG-linked loans over time and monitor the reduction in carbon intensity.
- Dashboards and scorecards: Summarize ESG performance metrics, borrower risk profiles, and the bank’s overall ESG lending impact.
- Geographic maps: To visualize the regional distribution of social impact loans or community development projects.
Dashboard integration
Key integrations for a comprehensive ESG dashboard -
- Data sources: Integrate data from internal lending systems, external ESG rating agencies, borrower ESG disclosures, and climate risk models.
- Custom reports: Generate reports for different stakeholders, such as management, regulators, or investors, that show ESG performance across different dimensions (E, S, G).
- Comparative analysis: Benchmark the bank’s lending portfolio against industry standards or global ESG best practices to track performance.
By implementing this dashboard, the bank can gain a comprehensive view of how its lending activities align with ESG principles, ensuring that its loan book not only supports financial growth but also contributes positively to environmental sustainability, social development, and good governance.
