Relevance of ESG to the banking sector

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Meeting the Global Sustainable Development Agenda 2030 is the responsibility of everyone, especially the banking sector as a key enabler to inclusive economic growth. The World population is estimated to be 9.8 billion by 2050. We will have tripled our waste production to 3.4 trillion tonnes, tripled our plastic waste by 2050 with apparently more microplastics in the ocean than fish – with more demand for homes, electricity, water and food. This intense growth will come with significant pressure on natural resources as we extract more to meet the demand for growth.

The financial sector as an enabler to economic growth will need to re-imagine how they finance economies to ensure that amplified emphasis on environmental, social and governance (ESG) sensitivities are taken into consideration. ESG has become a very important tool to measure performance in the financial sector.

For investors, ESG is the act of funding businesses that demonstrate positive impact on the environment, support their stakeholders and demonstrate ethical leadership and good governance. Integrating ESG by organisations is the practice incorporating ESG considerations into decision-making, risk frameworks, corporate practices and governance frameworks.

Incorporating ESG into mainstream banking is becoming integral in assessing the performance of banks; not just in meeting compliance, but for investors and Foreign Direct Investment (FDI) opportunities within the banking sector. The evidence of ESG importance in the financial sector is shown in the growth of Principles of Responsible Investment (PRI) signatories – which increased from 250 in 2006 to almost 4,000 assets in 2021, with a total volume of over US$120trillion under PRI management.

The advantages of ESG are also becoming evident and well-documented with proven advanced performance in financial markets for ESG-aligned assets. Evidence of more resilient performance by ESG-aligned funds was apparent during the start of the Global Pandemic. ESG-aligned funds on the S&P Global market rose between 27.3 percent and 55 percent, while the S&P 500 increased 27.1 percent over that period.

Emergence of Sustainability Risks

The expectations of stakeholders on the banking industry’s role in managing sustainability issues have increased tremendously in the last few decades. The new dynamic is placing consumers at the centre of all transactions; because in the new era it is important that businesses and funders demonstrate how they are meeting human needs and meeting the Sustainable Development Goals.

Global challenges are becoming multi-faceted in nature, volatile and unpredictable, and can lead to severe business disruptions – as the global COVID-19 pandemic showed. The pandemic highlighted the fragmented nature of our business transactions and the importance of embracing ESG as a holistic approach toward business operations – wherein risks are identified, and new opportunities unlocked to create competitive advantages and long-term growth that unlocks tangible value for banks and their customers.

Sustainability risks, also referred to as ESG risks, have emerged since the concept of sustainability was introduced in the financial sector. The burden of meeting global goals and cutting greenhouse gas emissions will need the financial sector to play a critical role in the delivery of global commitments toward safeguarding the environment and building resilient communities.

Banks can play a critical role in closing the apparent gap in financing to meet the SDGs and GHG Emissions targets by 2030. ESG-aligned assets were over US$30trillion in 2018, according to recent research by the Global Sustainable Investment Alliance. ESG investments are expected to exceed the US$100trillion mark by 2030 according to a forecast by Deutsche Bank.

Banks in Ghana are increasingly required to incorporate ESG into risk management frameworks, which has led banks to be more conscious about how the funding they provide is being used. The global pandemic especially highlighted the importance of corporate good governance, with clear evidence of better performance from well-governed companies underlining the fact that social and environmental responsibility can add tangible value to businesses in emerging markets.

In 2019, all 24 banks in Ghana signed up to the Sustainable Banking Principles which outlined a set of seven Principles to guide them on how best to integrate sustainable banking into their operations. Also, five Sector Specific Guidance Notes were developed to help them easily map their risks in sustainable banking with potential impacts and unlock financially viable opportunities in a holistic manner.

Ghana as a key contributor to global commitments is a signatory to the Paris Treaty on Climate Change, whereby Ghana pledged its commitment to cutting greenhouse gas emissions via the Ghana National Determined (GND) Contributions and 2030 Agenda for Sustainable Development. The former is a legally binding international treaty on climate change which was adopted by 196 parties at United Nations Community of Parties (COP) for climate change in Paris, on 12 December 2015; while the latter provides a shared universal blueprint for peace and prosperity for people and the planet, now and into the future, via a set of 17 Sustainable Development Goals. The delivery of these critical global agendas will require both public and private sector financing.

For banks in Ghana, the availability of ESG-linked funds which are geared toward reducing greenhouse gas (GHG) emissions via Ghana NDCs, and assisting Ghana meet the SDGs through responsible investments, unlocks opportunities for access to international funding and alignment with opportunities from impact-oriented projects. ESG-aligned banks will have opportunity to access ESG-aligned funding, while increasing their competitiveness via exposure to new opportunities which help Ghana meet its global commitments; thereby reducing the existing gap in funding for climate change and achieving SDGs, especially by the private sector.

The relevance of ESG

Institutional investors especially are now very aware of the growing importance of ESG factors in financial matters and investment decisions. They require banks to demonstrate how they integrate ESG into their lending mechanisms and risks framework, and demonstrate how this plays a role in driving tangible outcomes and impacts while earning returns on their investments.

Access Bank, for example, as a leading digital bank has a robust Environmental and Social Risk Management (ESRM) that ensures projects considered for funding are cleared for environmental and social risk before lending decisions are made. Some institutional investors are also divesting from assets which could potentially depreciate over time because of the proliferation of ESG sensitivities – e.g. fossil fuel assets. They are seeking investments that will deliver real impact on climate change, create inclusive growth, and reduce inequalities in communities.

Banks like Access Bank have a long history of engagement in communities through their Employee Volunteering Programme. Every year, employees are mandated to align with the bank’s programme to undertake community engagements which align with its SDGs of influence. Last year, Access Bank undertook initiatives aligned with SDG4, aimed at inculcating the habit of reading in children across 12 communities in Ghana.

Banks need to take the preferences of institutional investors seriously, because investments into ESG funds have been increasing steadily. The Millennial generation is in line to receive a historic and most valuable transfer of inheritable wealth estimated at US$68trillion by 2030.

Millennials are generally known to be environmentally and socially driven, and will typically endorse institutions with demonstrable environmental and social considerations. Millennials are generally twice as likely to invest in a fund or stock with clear social responsibility criteria. Banks which embed ESG criteria in their fund allocation, investment portfolios and corporate practices will be better-positioned in attracting not only an important client base, but also a dynamic workforce more interested in purpose-driven institutions.

Investors are becoming concerned about the effects of climate change, extreme weather and regulatory compliance. Investors are also becoming concerned about social contracts and relationship of organisations to their communities, and are obviously paying heed to the dramatic increase in ethical consumerism that is driving how consumers choose products in the market. Above all, diversity, inclusivity and stakeholder activism are informing values attributed to organisations by ESG investors. To stay relevant and competitive, integrating ESG has become essential and critical to the long-term survival of banks because of the competing imperative of ESG-aligned funding.

The essentials of ESG-aligned investments

Proponents seeking investments in ESG funds will typically seek information about ESG performance. The ESG performance is an integral part of corporate disclosures which are made through sustainability/ESG reports. The corporate ESG Report provides an understanding of an organisations ESG performance. The report outlines progression in ESG initiatives over time, benchmarked against local, national and/or global standards.

It also outlines measures wherein compliance has been met, is yet to be met and where they fall short of compliance. Generally, organisations will highlight partnerships with environmental and social causes, as well as internal or third-party assessments on employee satisfaction, development and employer turnover. The best reports will appeal to a wide range of stakeholders in non-technical language including company vision, mission and message from the CEO or Governance Board.

To attract ESG investment, banks in Ghana will especially need to highlight how they meet the Sustainable Banking Principles and their ESG performance into their Annual Reports, and that they are fully compliant with the Bank of Ghana’s Sustainable Banking Reporting requirements. To enhance credibility, ESG reports can also be independently assessed to verify disclosures and win confidence of stakeholders.

How can banks integrate ESG into their operations?

  • Develop a plan: Identify material ESG issues that are critical to the bank, stakeholders and broader public. Establish ambition and buy-in of leadership, which is imperative to driving tangible change. Commitment to ESG issues which are aligned with a bank’s bottom-line generally unlocks more tangible results as compared to prioritising unrelated issues. Develop a plan that focuses on closing the gaps identified with SMART actions and defined goals which are delivered over a set timeframe, with due consideration to materiality and impact of the action plan.
  • Establish a dedicated ESG Desk: It is important to dedicate resources toward implementing ESG and not consider implementation as extra work for existing staff, as some banks including Access Bank have done already. Realignment of existing job descriptions can also yield tangible results, and it’s worth noting that the scope of ESG implementation may be potentially too large to realise without a dedicated desk.
  • Drive visibility through Corporate Reporting: ESG reporting is critical in attracting ESG-aligned investment, as investors and stakeholders will appreciate a bank’s ESG performance. It is important to avoid greenwashing and commit to disclosures that are verifiable. The ESG reports can be stand-alone documents or integrated into the Annual Financial Report, and can be combined with consistent marketing informed by a requisite communications strategy and strategic PR initiatives to improve visibility and branding to appeal to wider stakeholders.
  • Commit to continuous improvement: ESG investors are likely to track your ESG performance over time. It is therefore important to integrate a culture of growth, continuous improvement and education of key stakeholders – including leadership, employees, customers and key collaborators, especially the supply chain, about your ESG initiatives and commitments.

Some leading banks like Access Bank have proven credibility in good governance through their history of crafting internal sustainability initiatives which encourage employees to act as responsible citizens. They have long established a Sustainability Policy that enshrines the organisation of a Sustainability Week every year to celebrate the bank’s commitment toward good governance and environmental safeguards, refresh employees on current trends in ESG and operations – and most importantly, reposition the bank’s trajectory toward sustainability.

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