Taking a step back from ESG – and a leap forward towards a greener planet

The attention paid to ESG (environmental, social and governance) issues is rising all the time, and for good reason. Recent reports from The Climate Change Committee (CCC) state that the UK is behind schedule on its plans to limit climate change, with concern growing over how Government policies will be delivered in reality. This concern is shared by consumers and investors, who are increasingly focussed on how well a business is doing to fulfil the promises it makes to be greener, more socially responsible, and more effectively governed.

Because the headlines about ESG are everywhere, I’ve noticed the tendency to handle this as a single issue in general discussions. But taking a step back from what we mean by ‘ESG’ shows how careful we need to be not to lump all three parts together. Doing so carries the risk of diluting the intense scrutiny that needs to be applied to every area of an organisation’s operations.

Zeroing in on what matters most

In this case, I’d argue that focusing on the specifics of each component part is likely to lead to better outcomes. To me, it seems we’re still talking about ESG at too high a level. Zeroing in on the aspect here that arguably matters most – an organisation’s people – creates the opportunity to embed lasting, sustainable change that spans a whole enterprise.

It’s not just about setting targets for carbon emissions, in other words. Key skills are needed to achieve results in each of the three pillars, and really there’s no one size fits all. Every organisation will need a different mix, depending on where it’s at today, and where it needs to get to – and those skills will either have to be developed in-house, or brought in from outside.

Talent and sustainability

The nexus of talent and sustainability is something we look at in our Commercial Banking Top Trends in 2022. One of those trends, ‘Sustainability may just be a banking superpower’, focuses on the real power banks have to change the world – provided they can embed sustainability in their operations.

Digging deeper, this trend examines how banks can make a real difference to the planet by going beyond the sustainability pledges they’ve already made. Instead, they can position themselves as leaders in the fight for sustainability.

So what will that take? There are a number of elements here. Sustainability-linked lending is of course crucial, and there’s mounting pressure from the public, governments, regulators and institutional investors for banks to step up their efforts here. Key actions include driving greater access to capital for underbanked groups, rebalancing credit portfolios to include socially and environmentally conscious funding, and increasing their allocation of capital to sustainability-linked loans.

But like I started by saying, this is far from the whole picture. And while all these steps represent great progress, they won’t on their own realise the huge potential banks have to make a difference.

Seeing the bigger picture

Banks increasingly recognise that having a truly green focus is key to recruiting (and retaining) talent. In our research, 64% of millennials said they wouldn’t work at a company that does not have a strong sustainability policy. So, sustainability initiatives need to be pervasive, convincing and committed – otherwise the next generation of talent won’t be interested.

Banks also need to look at how their relationship managers engage with clients about ESG priorities and execution strategies. That’s a vital way to engender change and lead by example, and it won’t happen unless sustainability is engrained in every aspect of a bank’s strategy and operations. This has to include a clear commitment coming right from the top.

The right trade-off to make

Of course, there are likely to be some significant costs for banks from this transition. One example? Look at the new EU’s new ESG reporting regimen. As this is currently drafted, it represents probably the biggest regulatory change to the global banking system since the Basel Accord coming out of the 2008/2009 recession.

European banks will, by 2024, be facing the world’s strictest rules on ESG reporting. Any banking groups headquartered within the EU (including Iceland, Liechtenstein and Norway) will, by then, have to report on how aligned their financing is to the ‘EU Taxonomy’, which sets out what activities are officially considered ‘sustainable’. A technology architecture that unifies all relevant ESG data into a single source of truth – one that can then be distributed and analysed to meet various use case requirements, at speed and at scale – will be vital.

Expensive as compliance will be, there’s no doubting that this is just one manifestation of a new world where banks will be increasingly expected to play a decisive role in the drive to sustainability. The ones that get it right, embedding ESG into the heart of their operations and thinking about it in a more granular way, will realise returns – for the planet, and for their own businesses – that make it more than worthwhile.

I’d love to hear your thoughts on these issues, and connect to discuss more. 

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