Authors:
Pulkit Bhardwaj, Associate Director Sales – UK&I and EMEA, SunTec
Samuel Davidowitz, Sales Director – US, SunTec
Alex Garkov, ESG Account Executive – Sustainable Finance, EcoVadis
Despite financial market fluctuation, global efforts to secure a more sustainable and eco-friendly future are only increasing. New ESG frameworks are changing how banks and corporations address their sustainability goals, and new consumer pressure is requiring institutions to turn a previously sub-tier risk category into a global business strategy. ESG is providing a framework for business that goes beyond mere compliance standards – ESG is the future of the financial services industry and leaders must get ahead to ensure their relevance for years to come.
Regulation is just the tip of the iceberg
What was previously a patchwork of ESG regulations globally are now harmonizing to provide a unified scope of ESG standards with cooperation from the EU, US, and other global regulatory bodies. Banks are now more involved in ensuring their ESG frameworks than they have been in the past and part of this change is due to the wider availability of ESG ratings that track an institution’s commitment to ESG principles across their entire value chain. ESG ratings are important to communicate with both business partners and end-customers the overarching sustainability practices that are being engaged across an entire organization.
The goal for banks is both to account for the mounting regulatory pressures globally, but also to align ESG principles with their core business goals. Previously, ESG existed as a siloed entity within the risk discipline, and the most successful banks will elevate these standards to increase social responsibility in their industry and communicate these goals to the end-customer. Customers, corporate or otherwise, are becoming increasingly aware of the components of ESG and are scrutinizing their businesses choices and partnerships accordingly. Conscious customers, for instance, are seeking ecofriendly solutions, such as deposit products that reward customers for their commitment to offsetting their carbon footprint. Banks have an opportunity to evaluate their current product portfolios to determine if their offerings match up with their ESG principles as an organization.
As ESG ratings become a more widely used metric, regulatory bodies will only increase their scrutiny. This also is in line with other regulations requiring transparency in the financial sector, such as the Digital Operational Resilience Act (DORA), that is pushing banks towards transparency in all aspects of business. Shifting away from ESG as a compliance checklist or reporting requirement and instead towards ESG as a core pillar of business practices is required to express sustainable priorities to end-customers.
ESG in the face of economic downturn
The current banking climate is seeing major consolidation and collapse, sounding alarm bells to across the financial sector to tighten up risk management practices. While it can be easy to drop the ball on what feels like lofty goals, ESG risk must be factored into the risk management framework of banks like any other operational or financial risk. Even in this current economic situation, there is a need for banks to lead the charge for ESG, as these priorities are not going away.
It is important to communicate wider ESG goals and to begin examining the possibility for sustainable products across the banking sector to both encourage and reward ESG-forward behaviors. For example, there are a number of banks that are rolling out Green Deposits programs that allow organizations to support their sustainability initiatives and increase their ESG rating. These products allow each dollar deposited to be matched and held in an environmental lending portfolio that supports renewable energy, sustainable water, forestry and more.
What is the way forward?
The future of ESG is about developing real, measurable indicators of sustainability practices. Sustainable Development Goals (SDG), pioneered by the United Nations in 2015, have become international metrics that banks are tying their core ESG goals to. Measuring up to SDGs is a top priority as banks continue to communicate their sustainable goals through developing key, applicable metrics. These metrics aren’t just for board measurement either – ESG ratings extend the ability to offer better products and services. Customers are wanting to make strategic partnerships that will increase their ESG rating, and banks must factor in this demand into their product offerings to ensure future growth in an increasingly conscious marketplace.
ESG ratings are just a start, and banks will continue to apply more reporting metrics as a means to measure against their own success in adhering to ESG principles. Banks must adapt to remain competitive and better serve their customer base and must view themselves as partners in building a more sustainable future. It is time for banks, large and small, to go beyond tried and tested compliance checklists and regulatory frameworks and be the leaders of tomorrow.
