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CIB Bank
The growing role of ESG in banking
Most of us have heard about ESG by now, as it is becoming more and more of a buzzword these days. But it is not only a buzzword; it is becoming a fundamental pillar both from a profitability point of view, an ethical point of view and an environmental point of view. Today, most people already have a strong awareness of critical global problems like sustainability issues, climate change, overpopulation, scarcity of resources or environmental degradation. Companies have also recognized the importance of corporate responsibility in these topics. However, recognition is only the first step toward change, while now ESG can be a crucial part of taking action for real improvements. It can be said that the concept of ESG plays a growing role in our increasingly complex world. In recent years ESG is becoming more and more relevant in the banking sector, as it is one of the most a significant drivers of the economy. It also has a considerable influence on both short and long-term sustainability. Consequently, ESG factors must be integrated into financial institutions' business strategies, processes, internal governance and risk management framework for a more sustainable society.
Although it may seem as if we are talking about something completely new and unknown when we mention ESG, we have used somewhat similar concepts in the banking sector. (For example, we could say green banking, which is not far from the environmental concept of ESG.) We could ask how this concept is different now from the ones we have met so far and why it is necessary to pay special attention to it. In addition to the fact that ESG takes several factors into account, which we are all familiar with (Environmental, Social and Governance factors of ESG), we believe the key to it is timing. It took many years until people and companies got to where we are now, that there is such an interest and expectation towards ethical and environmental protection factors that, in the case of this concept, we are no longer just talking about something that is "nice to have," it is something that is we must follow. As there are more and more people that are actively interested in ESG and want to buy products that are aligned with ESG regulations or would like to invest in companies that are following ESG, or would like to purchase funds and investment products which are in line with ESG, this concept is already becoming one of the fundamental pillars and one of the most important KPI of banks.
The critical question is, what options do banks have when it comes to ESG? Although when we talk about ESG-related banking products, the most common things that come to mind are sustainable investments and green lending, the possibilities are endless.
For example, from manufacturing credit and debit cards made from only recycled material to providing digital solutions for socially vulnerable segments or creating unique insurance products, or even gamification tools to educate clients the potential of this concept is limitless. Banks now have the opportunity to be creative and gain a competitive advantage with products that target different customers and needs in an ESG-compatible way. Most European banks have already started integrating ESG into their core business activity. In the near future, we will see more and more solutions initiated by the concept of ESG that is not yet widespread.
Banks have already started to take serious steps to be in line with ESG principles. In most instances, dedicated ESG functions or departments are set up within the organizations, sometimes directly reporting to the CEO, to deal with these issues on an overarching strategic level. A well-prepared ESG strategy should be able to define a clear and measurable set of ESG-related KPIs, which ensures that actual results can be tracked and delivered. This could serve as a backbone for regular reporting and communication, both internally and externally, to raise awareness and spread respective knowledge. By following ESG principles, banks not only commit to an environmentally and socially better world, but they can also leverage new business opportunities. Repositioning or exiting from ESG-sensitive industries and promotion of financing sustainable business models can also bring significant marketing value and actual profit, as consumers and enterprises increasingly take into account these considerations when choosing a banking partner. Based on consumer confidence surveys and research, millennials tend to change their shopping habits to reduce their environmental impact much more than millennials.
The focus of all important stakeholders on ESG issues has grown considerably in recent years not only in consumption choices and job decisions, but also in investment preferences. Furthermore, they also consider ESG-related factors more when choosing a company to work for. To catch the growing market opportunities and the investor need, ESG needs to become the engine of growth and defining attribute of the company.
As a starting point, financial institutions can come up with some quick wins, such as introducing social bank accounts for vulnerable social groups, providing preferential financing based on fulfilling ESG criteria, or providing ESG-focused investment funds for savings. Some increasingly widespread retail products on this terrain, such as green mortgages and loans, aim to incentivize the purchase of high-efficiency houses and encourage sustainable assets, such as electric cars, supporting the use of renewable energy. Philanthropic activities and charity work will also gain further momentum in the future, including sponsoring artistical and cultural events, fundraising for special causes and giving back even more to society.
Another vital area to make an impact is the enhancement and boost of insurance products with social and environmental underlying value. Green insurance products may be offered with lower premiums for hybrid or electric cars, eco-efficient buildings, certified appliances or machinery or companies with adequate environmental management systems. Financial institutions may also lead the transformation through their advisory arms to foster ESG themes within their scope of clients.
Digitalization can also boost ESG awareness and the fulfilment of ESG-related KPIs, and fintech ecosystems may be pioneers in driving sustainability in their products and operations. This overall category of fintech is often called Sustainable Digital Finance (SDF). Some practical digital solutions are, for example: (i) offering Virtual cards (no plastic card) and virtual payments (digital wallet), (ii) Offset of Customer's CO2 emissions through donations to non-profit organizations or (iii) offering daily green banking actions such as paperless statements or withdrawal reduction.
By educating users and incentivizing them to choose the remote channel instead of going to branches, banks can guide clients to a new ‘modus operandi’, in which the usage of chat and remote banking services would be promoted to boost awareness of the individual carbon footprint, which can be reduced by doing so.
In the following months and years, we believe it will be exciting and a great thing to see how the increasing role of ESG will affect our future, how certain banking products will be transformed, what new things we will encounter, and we will actively participate in following the ESG concept, so the banking sector can contribute to making the future better, together.
