ESG is both an acronym and a market mover, but what does it really stand for? In the absence of definitive standards, many terms are interchanged to describe a company’s performance as a steward of nature and how it manages relationships with employees, suppliers, customers and communities. It seems there are many shades of green. This blog explores the evolution of “green finance” and some of its challenges and opportunities.
Green finance is an opportunity to align financial services with environmentally friendly, sustainable and resilient growth worldwide. At a recent G7 Summit, world leaders identified the need to “green the global financial system so that financial decisions take climate considerations into account.” Likewise, in July 2021, the European Commission unveiled an ambitious strategy to help improve the flow of money towards financing the transition towards a sustainable economy.
Key trends to watch in this space:
- Companies across all sectors and around the world are incorporating Environmental, Social and Governance (ESG) into business-as-usual
- Investors are divesting from companies that fail to meet their sustainability criteria
- Central banks are incorporating climate change into strategic discussions and policies
ESG standards are evolving, and it’s crucial for companies to be transparent and data-driven with regards to quantifiable ESG goals, benchmarks and results. Those that are not may face allegations of “greenwashing” – in other words, claiming to be more environmentally friendly than they truly are.
What does green mean?
So, what does green finance really mean and why does it matter?
In practice, green finance sits at the crossroads of finance, investment and the environment. Some confusion exists primarily due the proliferation of terms that are really variations on a theme. These common themes include responsible investment, sustainable finance, climate finance and Environmental, Social and Governance (ESG). The latter is essentially the flagship and worthy of further consideration because of its increasing role in company policies.
Socially conscious investors use ESG criteria as a framework to evaluate company operations and screen potential investments. Environmental criteria consider how a company performs as a steward of nature; social criteria examine how it manages relationships with employees, suppliers, customers and the communities where it operates; governance deals with a company’s leadership, executive pay, audits, internal controls and shareholder rights.
ESG is not new, but interest in it has certainly blossomed in recent years. As a notable trend, ESG is becoming a major pillar of investment and moved from being impressionistic (qualitative) to scientific (quantitative). It is no longer acceptable or possible to “greenwash” a company. Investors are savvy and want quantifiable data and information. Large companies must measure and demonstrate their green credentials. For example, “climate funds” must be aligned to specific outcomes.
We can expect that ESG claims will come under increasing scrutiny, and companies must demonstrate total transparency. Banks should include ESG in their product design, pricing and marketing. While many banks are doing this in a piecemeal way, the time is right for a holistic approach at bank level.
Consider these statistics:
- ESG assets are forecast to reach USD $53 trillion by 2025, representing one-third of global assets under management.
- The S&P 500 ESG Index outperformed the S&P 500 by 1.53% for the one-year period ending October 29, 2021, and 2.06% since its inception on January 28, 2019. 
- 71% of people with ESG investments want more knowledge and transparency about where their money is invested, up from 65% in 2020, and 79% think all banks and financial providers should be more transparent about where people’s money goes.
- Eight in 10 consumers call for greater transparency from banks and financial institutions as concerns about whether so-called green funds are truly ethical rise year-on-year.
- 73% of new investors say they prefer to choose investments that support positive change for the planet and its people, higher than the average of 64% for all investors.
In practice, ESG is about everything a bank does, and it involves all stakeholders. As banking becomes more open and collaborative, ESG policy is not confined to a bank but extends to its partners as well. For example, a bank that partners with a company that has an inadequate ESG policy may incur damage to its brand and reputation because of “guilt by association.”
Banks should act now to make ESG a strategic concern that:
- Evaluates the ESG credentials of customers, partners and prospects using consistent, quantifiable criteria
- Provides for current and prospective ESG regulation and evolving market practices within the bank and along the entire financial value chain
- Provisions for the “greening” of all business processes
- Identifies ESG risks within the bank’s risk management framework and quantifies the bank’s overall ESG exposure (akin to current bank stress testing)
- Positions ESG at the heart of the bank’s brand and all that it stands for
Most banks provide customers with a range of financial wellness tools and capabilities. This concept could even be extended to include an “ESG hub” between corporate customers, investors and other relevant stakeholders.