Let’s talk about data governance in banking and financial services, one area I have loved working in and in various areas of it … where data isn’t just data, numbers aren’t just numbers … They’re sacred artifacts that need to be protected, documented, and, of course, regulated within an inch of their lives. It’s not exactly the most glamorous part of financial services, but without solid data governance, banks would be floating in a sea of disorganized, chaotic, and potentially disastrous data mismanagement. And when we’re talking about billions of dollars in transactions, we’re not playing around.

As Bob Seiner, a renowned data governance expert, puts it, “Data governance is like oxygen. You don’t notice it until it’s missing, and by then, it’s probably too late.” If that doesn’t send a chill down your spine, nothing will.

Why is Data Governance Such a Big Deal?

In the banking sector, data governance is more than just a compliance checkbox. It’s essential for survival. Banks process an astronomical amount of sensitive information daily—think trillions of transactions annually—and they need to manage that data efficiently and securely. According to the World Bank, the global financial industry processes over $5 trillion in transactions every day. That’s not the kind of volume you want slipping through the cracks.

Even a small data breach can cost banks upwards of $4.35 million on average, according to a 2022 IBM report. No one wants to be the bank that has to call its shareholders after that kind of financial disaster.

Data governance helps mitigate these risks by ensuring data is accurate, consistent, and compliant with regulations like GDPR, CCPA, and Basel III. These rules are about as fun as reading tax code, but they’re crucial in ensuring customer data is protected, privacy is maintained, and banks don’t end up with regulators breathing down their necks.

Tools of the Data Governance Trade

Let’s talk about the cavalry—the tools that keep all this data governance stuff from turning into a full-blown nightmare. Thankfully, in 2024, we’re spoiled with a variety of platforms designed specifically to handle this madness.

• Collibra and Informatica

  • Collibra and Informatica are heavyweights in the data governance world, offering comprehensive suites for data cataloging, stewardship, and governance. Financial services companies like AXA and ABN AMRO rely on these tools to handle everything from compliance workflows to data lineage mapping.

• Alation and Talend

  • Alation is known for its AI-powered data cataloging and governance capabilities, while Talend excels in data integration and governance. Companies like American Express have adopted Alation’s tools to streamline their data governance operations.

The Future of Data Governance in Banking

Looking forward, the financial sector’s reliance on robust data governance is only going to increase. With the rise of AI, machine learning, and real-time data analytics, banks will need to be even more diligent in how they manage and govern their data. A recent study from IDC suggests that by 2026, 70% of financial institutions will have formalized data governance frameworks in place. That’s up from around 50% today, meaning that the laggards are starting to realize that flying by the seat of their pants just won’t cut it anymore.

Jamie Dimon, CEO of JPMorgan Chase, emphasized the importance of data governance in a recent shareholder letter, stating, “Data is the lifeblood of our organization. Our ability to harness, protect, and leverage it effectively will determine our success in the coming decades.”

Climate risk models are the newest elephant in the room. As banks face pressure to account for environmental factors in their risk assessments, data governance plays a critical role in ensuring the accuracy and transparency of these models. According to S&P Global, nearly 60% of global banks will be embedding climate risk into their core business models by 2025.

In a world where data is king, and compliance is the watchful queen, banks are stuck playing by the rules whether they like it or not. Data governance tools are not just for keeping regulators happy, but they also give financial institutions the confidence to innovate, knowing that they’ve got their data house in order.

A recent survey by Deloitte found that 67% of banking executives believe that improving data governance is critical to their digital transformation efforts. This statistic underscores the growing recognition that effective data governance is not just about compliance, but also about enabling innovation and competitive advantage.

So, yeah… data governance might not be the flashiest part of banking, but it’s the foundation that holds everything together. And if there’s one thing we can agree on, it’s that nobody wants to be the bank that ends up on the evening news because they forgot to lock the vault—whether it’s the physical one or the digital one.

“As if there weren’t enough jargons and complex terms to remember for an investor, you are telling me I need to now know about ESG and Climate Risk – You must be kidding me!!” – These are the exact words (with a couple of expletives, that I cannot quote here) – a senior fund administrator from a large investment firm uttered when we were presenting about environment aware financial risk management.

For some of the old-fashioned investors, who grew up in the “Wild Wild Wall Street” days, this still seems a bit farfetched. But you know what, anything that can make more money, intelligently in the long term is a good idea for all investors, investment managers, banks and consultants like me. So, hear me out – I may help you make your next big profitable move, be it investing, divesting, or selling a new idea.

Warren Buffett wrote: “Today our world is changing faster than ever before: economic, geopolitical, and environmental challenges abound. However, taking shortcuts is not the pathway to achieving sustainable competitive advantage, nor is it an avenue toward satisfying customers. In times such as these, a company must invest in the key ingredients of profitability, people, communities, and environment.”. I, for one, listen when this legend speaks.

What does it mean?

ESG? – The textbooks define it as a “a set of criteria used to assess the sustainability and ethical impact of investments in companies or organizations. Environmental factors evaluate a company’s impact on the environment, such as its carbon footprint, resource usage, and efforts towards sustainability. Social factors consider a company’s treatment of employees, diversity and inclusion practices, community relations, and involvement in socially responsible initiatives. Governance factors focus on the organization’s leadership, transparency, accountability, and adherence to ethical business practices.”

ESG criteria help investors make informed decisions by considering not only financial performance but also the broader impact and responsibilities of the entities they invest in. This is also one quickly becoming one of the parameters on which Investment Companies, Banks and HNI clients want their investments to be routed towards for a sustainable long-term benefit. Companies that prioritize strong ESG practices are often seen as more forward-thinking, resilient, and better positioned for long-term success in an increasingly sentient and interconnected global economy.

So making a profit while doing good is an idea we all can benefit from. But to take it to the next level, as larger banks and investment firms bring in these criteria as a deciding factor on some of their investments, guess what’s going to happen to the companies that adhere to the ESG standards? They are going to grow in value and profits. Making these companies great investments in the longer term.

How Do I know?

Base our investment on ESG factors you ask? Well, while some major investment firms have made it mandatory to check ESG scores while investing and consider Climate Risk as a part of their Global Investment Portfolio Risk Assessment Criteria; others use it as a tertiary decision driver.

Most rating agencies today including Bloomberg, Dow Jones, Thomson Reuters and MSCI provide ESG Scores for publicly traded companies, though a standardization in the scores and its global applicability is something that the governing bodies including FDIC (Federal Deposit Insurance Corporation) in the USA and ESMA (European Securities Markets Association) in EU are working towards. A major step in this direction is the European Union Markets in Financial Instruments Directive II (EU MiFID II) Regulation requiring financial firms to incorporate sustainability preferences into their advisory and portfolio management processes since 2022. So in case you are planning to also invest in European markets, now you have to know ESG scores of every company you plan to invest in!

ESG criteria help investors make informed decisions by considering not only financial performance but also the broader impact and responsibilities of the entities they invest in. This is also one quickly becoming one of the parameters on which Investment Companies, Banks and HNI clients want their investments to be routed towards for a sustainable long-term benefit. Companies that prioritize strong ESG practices are often seen as more forward-thinking, resilient, and better positioned for long-term success in an increasingly sentient and interconnected global economy. Whilst ESG factors are more wholesome and elaborately modelled, it is important to recognize that Climate Change accounts for only one of the ten ESG key themes as set out by the MSCI [ENVIRONMENTAL – Climate Change, Natural Resources, Pollution and Waste, Environmental Opportunities; SOCIAL – Human Capital, Product Liability, Stakeholder Opposition, Social Opportunities; GOVERNANCE – Corporate Governance, Corporate Behavior] but plays a significantly important role from a financial risk management perspective.

How does it impact me?

I can assure you, it’s going to impact you if you are an Investor, or a Bank or a Financial Consultant. ESG and Climate Risk aware investments are going to be tracked, appreciated and in some cases mandated over the next few years as financial risk reforms and directives like MIFID II become mainstream and while this is the more technical reason, I will also attempt to answer it more directly.

Its fairly clear that as an informed investor, good long-term investments is a basic, tried and trusted strategy. ESG investing will focus resources on scrips whose underlying companies that follow positive environmental, social, and governance principles. More and more investors are expected to align their portfolios with ESG-compliant outfits and providers, making it an area of growth with positive effects on society and the environment. And more demand means rising prices of stocks and hence more profits.

Banks and Organizations have also started to address a growing number of critical drivers concerning ESG. This new international and national legislation and regulation and the voluntary disclosure approach led by the Task Force for Climate-Related Disclosures (TCFD) in addition to Increasing public concerns and pressure from lobby groups, activists, regulators and investors.

A significant chunk of investment is already being made in the Banking and Financial Services industry, especially in the risk management area that addresses the ESG and Climate Risk related strategies and disclosures. This is an opportunity for consulting firms and individuals to build and hone expertise in the area and field for more regulation and hence more transformation driven work in core and tertiary capacities.

All and all, ESG and Climate Risk is going to impact all of us, one way or the other. Whether we take the opportunity, take cognizance and make the most of it is up to us as an individual, an organization and a community as a whole.