Why Banks Should Begin Embracing ESG — Now
Research indicates a high level of support for sustainable businesses in both developed and developing countries. According to the World Economic Forum’s feature on consumer eco-awakening, the public concern for nature globally has risen by 16% over the past five years, continuing to grow during the pandemic and spurring millions of people to act against irresponsible climate practices. The demand for sustainability is loud and clear across all sectors.
It goes without saying that the highly regulated banking industry will likewise be subjected to this green wave. Institutions are now turning their attention to Environmental, Social, and Governance (ESG) criteria. In our post called ‘Investors Are Advancing ESG Issues on All Fronts, we mentioned how many investors and banks have already incorporated ESG considerations into their portfolios and products. However, there is still an ongoing debate surrounding ESG.
Many banks struggle to define ESG issues and question the impact of a sustainability-oriented strategy. There is a fear that an ESG-focus will limit investment choices, which will leave a negative impact on their returns — even though these investments are unquestionably better for humanity’s future. Here are three key reasons why banks should embrace ESG principles now:
To meet consumer requirements
Banks are starting to feel pressure from customers and the public at large. Clients want to bank with firms that reflect their values, with younger generations, in particular, choosing where to bank based on ESG credentials. Banks are also facing scrutiny from high-profile campaigns over the impact of their lending practices on human rights, gender equality, social cohesion, carbon emissions, biodiversity, and other ESG topics. In fact, nonprofits and activist investors are working together to review the climate impact of bank lending practices, naming banks who have invested in fossil fuels.
For the banks already at the forefront of ESG, they are delving into customer data and customizing recommendations according to more sustainable business models. They’re also assessing how their models should evolve over time to meet sustainability goals, and reframing their decision-making processes through an ESG lens. In some cases, banks are also inspired to incentivize climate-positive behavior among their customers.
To grow more competitive
Green banking has a long way to go until it becomes mainstream in banking, but awareness has taken off. A study done by Inha University on green banking found that it’s an emerging area of opportunity for private sector banks and a focal point for competitors. Leading global banks have made commitments to ESG in some form, and others are following. As Maryville University’s post on investment banking points out, there is a lot of competition within the industry, with the number of analyst jobs increasing by 6% between 2018 and 2028. Specializing in sustainability offers banks a strong advantage, as they connect green businesses in need of capital with interested investors.
Top banks are willing to go green to increase their economic value, comply with government regulation, and enhance their firm reputation. Green banking also opens up a new segment for products and services. Wealth managers are working on ESG-informed investing, while retail banks are starting to offer green home-improvement loans, carbon neutral banking, and sustainable exchange-traded funds. Of course, banks would need to establish a dedicated climate-risk team to ensure their corporate rhetoric matches their reality.
To help the planet
Banks play a well-documented role in financing the current climate crisis. The BBC’s article on green banking habits notes that 35 of the world’s major banks have funded fossil fuel companies with $2.7 trillion between them since the Paris Agreement in 2015. In fact, fossil fuel financing has actually grown each year since then — so the banking sector can do much better in terms of ESG goals. Ultimately, we only have one planet and there’s no point in focusing on financial returns if the world becomes uninhabitable.
Aside from the ethics of avoiding contributing to climate change, banks know they need to act to protect their own investments from the physical impacts of environmental risks. Although the cost of ESG-centric operations may be higher due to extra research and due diligence needed, it’s essential for banks to take this step now as we transition to a low-carbon world.
Written exclusively for Iiresearch.com
by Aileen Crowns