ESG & BFSI sector

Banks hold considerable clout in shaping and enabling the ESG

goals of industries and corporates
Banks undoubtedly hold considerable clout in shaping and enabling the ESG goals of industries
and corporates. In addition, they also have an opportunity to enable their own ecosystem by
embracing the right technology and designing policies around employment and inclusivity. Some
of the areas where banks have an opportunity to participate and drive ESG goals are:

Financial inclusion
Financial inclusion is key to achieving the goal of ‘ending poverty’ as part of the UN SDGs for
2030. Banks have an opportunity as well as a responsibility to provide banking services to the
unbanked and underbanked population across the globe, thereby allowing them to participate
effectively in the economic arena. Access to banking helps encourage savings and makes
inclusion into welfare schemes easier.

Pressure for sustainability rises

As the world starts to look to the future, expect regulators, oversight authorities
and policy makers to become more vocal about the need for greater adoption of
ESG. They recognize that moving towards a low-carbon economy will create
additional complexities for financial services firms. And they are worried that banks
are ill-prepared for the types of prudential and conduct risks that could arise —
both in terms of the direct risks (i.e. the physical impact of climate change on
assets) and the transition risks (i.e. the challenges inherent in a wholesale move
towards a low-carbon economy).

Investors will also be ramping up pressure on banks. In part due to the increasing
recognition that ESG factors, and climate change in particular, represent material
risks that must be managed.

Investors also want to ensure they can continue to earn a return on their
investment. Interestingly, recent data suggests that ESG-related funds
outperformed the markets over the first quarter of the year — when the COVID-19
economic crisis started. The MSCI World ESG Leaders Index, for example,
outperformed the regular index by 1.36 percent on the quarter.
and policy makers to become more vocal about the need for greater adoption of
Taking ESG seriously
While some big questions and uncertainties exist, it is clear that bank executives
can no longer afford to take a ‘wait and see’ approach. Public and regulatory
expectations are rapidly changing and the most competitive banks are already
moving to take advantage of that situation.

1. Understand your current baseline. More than simply quantifying

the financial risks and probabilities, banks should create an
understanding of common ESG expectations of key stakeholders and
build awareness of leading ESG practices, in particular amongst
senior management and board members. This includes taking time
to understand their current practices and exposures, including
whether they have the right data, the right capabilities and the right
processes to monitor and manage ESG appropriately going forward.
2. Know what’s expected. While regulatory and supervisory
authorities are exploring approaches as to how they might provide
specific targets or expectations, bank executives should be talking to
their regulatory authorities to understand what is expected of them
and how those expectations may change over the short to medium-
term. They should also be working proactively with their regulators
and authorities to seek out facts, develop standards and identify
solutions.
3. Put it on your risk radar. For many banks, ESG factors remain a
reputational risk. But they need to be more than that. Bank
executives (and particularly boards) should be ensuring that ESG
risks are a lens through which all decisions are made, especially in
relation to credit and valuation risks in their portfolios, reflecting the
strategic nature of these risks.
4. Develop a strategy. ESG risks cannot be managed off the side of a
desk. It requires banks to develop a robust strategy that is integrated
into the overall business strategy for the organization. While the
strategy must retain a level of flexibility, it must also be actionable
and measurable.
Embrace it
The impact of COVID-19 makes it clear that banks must act to embed ESG into their
strategies now if they hope to remain ahead of public and regulatory
expectations. The reality is that many leading banks are already taking advantage of
the ‘upside’ to execute a strong and integrated sustainable finance strategy. Those
who lag behind face not only increased regulatory and public scrutiny but also
constrained growth.
The bottom line is that banks can no longer afford to ignore ESG. Indeed, they must
embrace it.

Banks have long been concerned with sustainability in a mostly fragmented fashion. However, due to
the confounding flood of information and speculations about future regulatory changes, it is difficult for
most institutions to develop a comprehensive strategy for ESG factors.

While the Paris Climate Protection Agreement and the United Nations’ 2030 Agenda for Sustainable
Development are not industry-specific, initiatives have been started to involve the financial services
industry specifically, confronting them with the challenge to reconcile sustainability and economy. The
stated goals of the EU Sustainable Finance Action Plan — one of the most important publications of our
day — are the realignment of capital flows toward sustainable investments, the inclusion of
sustainability in risk management as well as the promotion of transparency and longevity. Consequently,
a broad range of EU regulations are in the process of significant changes. KPMG professionals are seeing
well-established organizations like the Bank for International Settlements (BIS), the European Central
Bank (ECB), the European Banking Authority (EBA) as well as relatively new associations like the Network
for Greening the Financial System (NGFS) publishing an evergrowing stock of papers. It is to be expected
that ground-breaking regulations in the context of sustainability — like the EBA Action Plan on
Sustainable Finance — will come into force during the next 2 years. Banks have long been concerned
with sustainability in a mostly fragmented fashion. However, due to the confounding flood of
information and speculations about future regulatory changes, it is difficult for most institutions to
develop a comprehensive strategy for ESG factors.

Furthermore, sustainability is rapidly gaining importance in society and increasing awareness for issues
such as climate change, social inequality or corporate misconduct and is changing the market
environment rapidly. Investors across the globe are showing a greatly increased demand for sustainable
financial products. Sustainability and corporate conduct are influencing the reputation and business
success of financial institutions. Thus, the trend toward sustainability has the potential to drastically
transform the global banking sector. Doing nothing and waiting is not an option. Banks that do not act
now will hardly have the chance to integrate regulatory requirements regarding sustainability into their
frameworks in good time, let alone adapt to the changed market requirements. Furthermore, simple
solutions are rare: abandoning a long-term relationship with an automotive supplier, for example, who
presumably will not adequately (quickly enough) manage the conversion to alternative drive
components, can lead to a loss of the bank’s reputation among this customer group. The continuation of
such business, in turn, can upset other stakeholders (such as NGOs) who may accuse the bank of
unwillingness to support the transformation process to a sustainable economy.

Banks need to respond to this with the following actions:

1. Revision of their business strategies in relation to their target customers, new products, etc.
2. Sharpening of brands and creation of sustainability strategies.
3. Implementation of updated regulatory frameworks along their entire value chains.