Article:

Management of ESG in Banking and Financial Sector

Introduction

 

After COVID 19, Businesses
shifted their emphasis from profits to people; human impact, equality and
health services were on the forefront. Economies crawled; everything from manufacturing
to mining either had shut down or significantly reduced operations. People
remained indoors. It was evident that environmental and social factors directly
impact economic stability around the globe.

Banks play a critical role in
driving a country’s economic progress and running the financial sector. The
banking system promotes economic growth by mobilising funds into investments
and increasing resource allocative efficiency. Thus, an efficient Banking
System is a necessary prerequisite for the country’s development. Serving as a
hub for savers and investors, these institutions form the foundation of financial
system for any country.

The banking industry is transforming
with digitalization and new norms particularly after COVID 19. Simultaneously banks
are facing increased competition and refocusing their priorities on delivering
a seamless digital experience. Digital solutions are providing the way for new
opportunities to banks. On the other hands, banks are expected to prove their
sustainability on a global scale. Gone are the days when bank valuation was
done by looking at their innovations. Now a days the banks are valued for their
readiness for ESG implementation. Banks play a critical role in ensuring
corporate social responsibility (CSR) and flagbearers for worldwide transition
away from very challenging carbon-emitting operations. Banks are really at the
crossroads. One challenge is to do profitable business and other to navigate
away from carbon emitting operations i.e. to do sustainable business. So, what
is ESG in banking? How can banks meet the requirements and regulations that can
either make or break these institutions?

ESG in Banking and Financial
Services

 

ESG stands for Environmental,
Social & Governance. It is a framework that answers the challenging questions
of how banks can respond to the questions related to climate change, pollution
and waste, customer satisfaction, Diversity, Equity, and Inclusion (DE&I),
ethics and compliance, and corporate governance.

For banks, ESG is the need of the
hour as these challenges and components are intertwined and an inseparable part
of the banking system. As Environmental, Social & Governance (ESG) is fast
transitioning from being voluntary to mandatory, the first step for banks is to
prioritize investments to ensure sustainable growth. For example, from customer
onboarding, data processing, fraud detection, customer accounting, lending of
funds, and regulatory compliance, the entire functions are risky and expected
to comply with certain levels of ESG adherence. In fact, banking companies, and
investors are looking at methods to optimize the processes for an effective and
impactful ESG implementation. In short, every bank is responsible for
protecting the environment, building a diverse society, and ensuring transparent
governance.

Why ESG for Banks?

 

ESG ratings for banks have now
become the yardstick, banks would do well to invest and improve their products,
infrastructures and processes aligned with ESG requirements. ESG in banking now
underpins many facets of the banking industry’s operations which is an
indicator to potential clients as to the reliability and sustainability of the
business. banks are now literally compelled to report on their sustainability
performance in an objective, measurable way. In fact, the recent developments
in the business world show that investors are now using the ESG criteria to
decide on the right bank to make an investment in the first place.

ESG reporting is important for
both management and shareholders of banks. Through ESG reporting, Bankers seek
to create more firm value and higher future profits. For the shareholders, ESG
reporting leads to more profitable share prices and dividends. One goal of reporting
is to provide ESG information because information on ESG influences the
shareholders’ investment decisions.

This occurs when the share price fluctuates
as a result of some new information. ESG report(s) promotes the development of
legitimacy, the satisfaction of stakeholders, and the prevention of future costs
for the organization. A positive image created by ESG reports is beneficial in
attracting employees and customers. All these factors can substantially
increase the profitability and value of the firm and are also add value for the
investors.

How banks can become an
ESG-powered ecosystem? How can banks develop a sustainable ESG strategy? As the
business world has been advancing towards building banks concerned about protecting
the environment, promoting equity, and creating trust, banks are valued in
terms of their societal responsibilities and the efforts they put in place to
go green.

Critical goals like to become
carbon neutral in all of their operations, converting routine financial
processes to renewable energy sources, and achieving net-zero carbon status are
at the forefront of banking industries. In order to expand their business and
enhance their reputation, banks should strategically build strategies to ensure
corporate sustainability and climate change efforts.

ESG in Banking: Building a
Sustainable Future

 

So, ESG is all about taking
responsibility for broader challenges around us. When banks embed ESG controls
across multiple functions, they will be able to deliver a modern and seamless
customer experience. They will also build a global community that is rooted in
respect, trust, transparency and long-term value.

As banks are rapidly developing
their ecosystem to service customers who demand around-the-clock service
delivery, it takes the discussions around the environmental impact of global
operations to enable compliant, resilient operations.

The end results will be long-lasting
and capable of proactively repromoting trust in banking institutions, providing
a platform to responsibly use natural resources. ESG also helps banks to use
sensitive customer data discreetly and also use technology to ensure privacy
and security. It also promotes ethical conduct across the business lines and
brings out transparent reporting.

Conclusion

 

When banks are concerned about
mobilizing customers to trust them, despite their multiple disconnected
systems, ESG can redefine their operations. ESG-compliant banks are proven to
be less vulnerable, future ready and more stable, and the commitment to
reducing the footprint of banking operations can help banks to deal with urgent
societal challenges that deliver new solutions. By following this essential
paradigm shift, ESG banking can now map critical business services to climate
adaptation and resilience.

Author: Vineet Bhardwaj

Vineet Bhardwaj is Chief Manager
(Faculty) at Union Learning Academy for Strategy and Finance at Gurugram. He
can be reached at vineet.710@rediffmail.com

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