Some banks across the globe have responded to the pandemic by focusing on employee and customer health, payment relief and immediate business stabilisation (capital preservation, in particular).
For the majority of organisations, sustainability became less of a priority, or was, at the very least, relegated to the bottom of the boardroom agenda. Despite this, many argue that in a post-pandemic world, environmental, social and governance (ESG) strategies will be pivotal to rebuilding and growing the economy. If so, how do African banks successfully incorporate ESG into overarching business imperatives and make a positive impact in the communities and environment that they operate in whilst retaining profitability?
Lead rather than follow
We have already seen tighter regulations, increasing policymaker expectations and civil society pressures to comply with ESG requirements. What’s more, investors are overly cautious about risk mitigation, given the current environment; acknowledging the inherent exposures that climate change and social discontent bring with them. Not forgetting younger generations advocating powerfully for more sustainable modes of living and of doing business, that increasingly only want to bank with institutions who they deem to be ethical and responsible.
Organisations can no longer afford to approach sustainability as a “nice to have” or as a function separate from the “real” business. It is critical that ESG principles become a central discussion in the boardroom, and that specific committees or roles are dedicated to achieving set goals – ensuring that sustainability is embedded within the core business strategy and operating model. This could include the appointment of senior roles for sustainability, tasked to lead ongoing strategy and implementation.
Ultimately, banks should be responsible for driving the industry agenda forward (bringing specific ESG deadlines closer) and going above and beyond, rather than simply complying with current legislative frameworks and waiting on additional rules to be enforced.
Balancing green and green
One obvious area of contribution is green financing – directing funds towards sustainable companies, investments and initiatives that generate the most positive environmental, social and economic impact, and by supporting clients to transition to more sustainable business models.
In Africa, ESG considerations are becoming increasingly important in lending decisions, especially those which include natural resources and extraction. Lenders now place additional focus on the impact of the funding on a country’s developmental goals, the environment and its people.
However, as one would expect, a significant portion of the balance sheet includes so-called “brown assets”, and consequently, banks will need to find a balance between profit and fiduciary duties towards shareholders, and the achievement of ESG targets.
Of course, simply “pulling the plug” on certain investments – such as those involving coal and energy producers in countries that rely heavily on the resource to generate base load electricity – could result in detrimental consequences, including wide-scale unemployment and a complete economic halt. Yes, banks will start shifting towards funding that meets specific “green” criteria, however, data and extensive information gathering will be required to outline potential scenarios and how best to address them.
Having said this, the cost of renewable energy is certainly decreasing, and technology is evolving, making implementation and adoption much easier. While the continent has far to go in maximising energy security and implementing sustainable energy sources, great strides have been made in varying the energy mix. Other facets banks are able to explore are loans focused on green home improvements, ESG connected bonds/ funds or partnering with development financial institutions (DFIs) to achieve specific aspirations.
Measurement, measurement and measurement
One of the biggest sector debates around ESG has been the effective measurement of success. Specific targets need to be set, whether this starts with internal auditing of paper usage, carbon emissions or the extent of green financing. Perhaps it could entail a customer and community trust index or highlight the contribution made to the development of small businesses, education and continental capacity building. Here, it is essential that every level of the business participates, and that all employees are held accountable. Sector cooperation also allows for standard evaluation processes.
Tracking and reporting environmental impact metrics, alongside financial metrics, provides organisations with a full view of business performance. This can help focus efforts to ensure results, increase accountability and transparency towards stakeholders, and highlight operational inefficiencies and cost saving opportunities.
Absa Group Limited is one of the funding signatories of the UN’s Principles for Responsible Banking, joining a coalition of banks globally who want to play an active role in shaping a sustainable future. These Principles provide Absa with the tools to capitalise on new business opportunities within the sustainable development economy, whilst effectively managing risk.
Going forward, it is clear that institutions that don’t start considering ESG in every decision (operational and strategic), will inevitably inhibit ongoing growth plans, and will also become the unwilling targets of regulatory and public scrutiny. Now is the time to embrace (green) possibilities.