The Impact of ESG on the Banking Industry
The impact of COVID-19 makes it clear that banks must act to embed environmental, social and governance (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. British banks are launching a wave of climate-change products and tightening lending standards amid criticism over their slow response to global warming.
Due to an increase in pressure from investors and stakeholders, banks are required to recognise that ESG factors, and climate change in particular, represent material risks that must be managed. Customers want to bank with a value system that reflects their beliefs; younger generations, in particular, are said to be choosing their bank based on their ESG credentials.
Banks need to understand all of the potential unintended consequences of their shift towards more ESG-related business strategies.
Advisors will now have to assist clients in drafting ESG management plans and codes of conduct for projects and transactions. The use of structured ESG due diligence and impact assessments on lending will also increase. With a new consumer base for UK banks going forward, they will need to ensure that traditional banks are not overexposed whilst transitioning into a niche and evolving area. Lawyers will need to assist clients to help them keep up with any new developments in legislation.
The commercial impacts of global climatic changes on total economic activity, the smooth functioning of financial markets and what strategies central banks need to adopt to reduce risk are some of the many considerations banks will need to keep in mind going forward.
Jargon Buster Glossary
ESG stands for Environmental, Social, and Governance. They are the three key factors when measuring the sustainability and ethical impact of an investment or product in a business or company.
By Surabhi Agashe – University of Bristol
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