What is the path of least resistance for banks
competing for leadership across Environmental,
Social and Governance (ESG) factors? What measures
are necessary to truly stand out and lead the pack
in the emerging area of sustainable finance?
Although major
consultancies, ratings houses, institutional
investors and non-government organisations (NGOs)
have been setting about establishing their own
defined ESG presence for the past decade, Australian
bank’s approaches to supporting their corporate
clients aspirations vary wildly or are “continuing
to evolve in line with market dynamics". If the
sell side is yet to determine a coherent strategy,
where does the buy side acquire appropriate support
and ESG advice?
Implementing ESG
principles and equipping corporate board rooms for
the new normal may be firmly on the agenda for banks
and their corporate clients, or at least they are
espousing to do so, however the specifics of how
they achieve more in the space is not so clear cut.
Whether operating an autonomous ESG division or
integrated ESG functions within separate product,
sales, credit, strategy and marketing teams, from a
CFO’s perspective it is for the most part ‘all
bluster and no bite’.
Much of the indecision
and false starts stem from the varying success and
impact sustainability adoption and investment have
had across separate industry verticals.
Implementation of successful ESG principles for
example across a domestic focused manufacturers’
supply chain will result in substantially different
outcomes from that of an agricultural business with
an active import and export function. These two
businesses will also require different approaches
and tools to achieve similar ESG compliance. Despite
this moving target for banks, corporates simply
expect more when it comes to reliable guidance and
advice.
Factors Holding Back
ESG Adoption
Is the clear reluctance
of many business banks to simply ‘join the
bandwagon’ holding back progress? Or is it driven by
the lack of appetite from their corporate clients
who aren’t yet convinced that the benefits will
outweigh the initial costs and disruption to
business as usual? Compliance and risk implications
continue to be the most pressing hurdles to overcome
for banks however this should not act as a deterrent
to broader based guidance and education for their
business clients. Setting the groundwork now for the
why’s and how’s will make for a smoother transition
once a bank has its internal policies and strategies
finalised.
2018 was a bumper year
for ESG and sustainability with a number of major
banks pledging billions of dollars to combat climate
change and many others pulling out of
environmentally destructive lending. This coincided
with a report from
HSBC which
highlighted improved financial returns as the main
driver behind investors embedding good ESG practices
into their activities. 2019 could be the year the
business community begins to embrace and integrate
ESG factors, particularly if it is evident that it
is good for business.
Global investment
managers such as BlackRock are extremely bullish on
green bonds and this year launched an
exchange-traded fund aimed at broadening access to
the quickly growing market for environmentally
friendly debt. More than US$500 billion in green
bonds has been issued since 2009, weighted in recent
years more heavily towards China, supporting the
creation of an index that the group expects to
continue growing quickly. Separately in Asia, Sukuk
investors are also increasingly considering ESG
factors and sustainability. Islamic and green
finance have found common ground and this provides a
viable foundation for further growth.
Who are you going to
call?
Corporates can be forgiven for
placing their trust in
TED talks
or
Leonardo Di Caprio’s
latest missives for guiding their ESG framework
policy setting given the swathes of misinformation
and lack of clear cohesive guidance from within
their advice networks. However, there is evident
demand for more information with the Clean Energy
Finance Corporation recording sizeable increases in
corporate enquiry, membership and investment volumes
in Australia.
Lack of knowledge and
education is a primary factor in businesses not
adopting certain risk management solutions such as
hedging their FX exposures and is something we see
repeatedly in our conversations with businesses.
While banks are by no means at the top of the list
of trusted advisors for businesses, ESG is an area
that could prove to be an exception with first mover
advantage going to the provider who positions itself
as a partner to business who is there to support and
guide rather than sell.
Ensuring ESG factors are at
the heart of financial decision-making for
businesses of all sizes can be driven by its
correlation to greater financial stability and
improved asset pricing. Businesses want to do
business and they want to do it better and longer
than their competitor down the road, or increasingly
their competitor across the ocean. Providers would
do well to focus on highlighting why and how ESG
practices can help them achieve their growth
ambitions.
Conclusion
A clear opportunity has
emerged for further education in the Australian, and
global market to arm senior executives including
CFOs and corporate treasurers with the requisite ESG
knowledge they need to remain competitive in their
segment. Clearer disclosure about the outright
benefits of investing in sustainability across the
company and justification for why ESG compliant
policies and strategies should be promoted ahead of
other strategic and operational investment decisions
is also a straight forward starting point in the
Australian market which arguably already has much
catching up to do with its international
counterparts.
Banks and financial providers
are in a privileged position with the success of the
UN’s Sustainable Development Goals and the
transition to a low carbon economy firmly under
their influence. The ability to shape and guide
business behaviour and the global outlook should not
be taken lightly and is an opportunity, particularly
in Australia, for providers to do better.
Previous Research Notes on
ESG and Sustainable Finance:
The
Opportunity for Sustainable Finance in Emerging
Markets
ESG
Financing in Asia – Ready for Take Off?
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