Banking on Sustainability: Navigating the ESG Frontier in India
ESG stands for environmental, social, and governance. In ESG frameworks, these are the three pillars and represent the three primary issue areas in which firms are expected to report. ESG aims to capture all non-financial risks and opportunities inherent in a company’s day-to-day operations.
Financial firms should adopt ESG practices for the following reasons:
1. Reduce potential risks: ESG practices can assist in identifying and mitigating potential environmental, social, and governance risks in a firm’s lending and investment portfolios, which in turn protect the firm’s reputation and finances, along with improving risk management methods.
2. Attract new customers: Customers are increasingly searching for financial institutions that are committed to sustainability and good business practices. By using ESG principles, firms can differentiate themselves from competitors and attract new customers who respect these factors.
3. Improve brand reputation: Adopting ESG practices can improve brand reputation and demonstrate a firm’s commitment to responsible business practices. This leads to increased confidence among consumers, investors, and other stakeholders, as well as a strong position for the firm as a pioneer in sustainable financing.
4. Generate new business opportunities: ESG practices can also create new business opportunities like sustainable finance products and services, leading to new revenue streams.
Products and Services by Banks in ESG: Some of the products and services that banks offer in the ESG space are:
a. Green Bonds: Banks can issue fixed-income securities like Green Bons to raise capital for projects related to renewable energy, energy efficiency, sustainable transportation, and waste management. These instruments are gaining popularity among investors who are looking for socially responsible investments.
b. Sustainable Investing Products: Banks can develop sustainable investing products such as ESG-focused mutual funds, exchange-traded funds (ETFs), and separately managed accounts, which allow investors to put their money into companies that are environmentally and socially responsible.
c. Sustainable Lending: Banks can plan to provide sustainable lending products designed to finance projects that have a positive environmental or social impact.
d. ESG Data and Analytics: Banks can help firms make informed decisions about their investments and operations by providing ESG data and analytics.
e. Advisory Services: Banks can offer advisory services to help companies integrate ESG considerations into their business strategy and operations, like providing guidance on ESG reporting and disclosure, developing ESG policies and procedures, and conducting ESG risk assessments.
Regulatory Landscape in India
The regulatory landscape for ESG in India is evolving rapidly, with several new regulations and guidelines being introduced in recent years. In May 2020, SEBI introduced guidelines for the disclosure of ESG information by listed companies. Known as BSBR, the guidelines require listed companies to disclose their ESG policies and initiatives along with reporting specific ESG parameters like carbon emissions, energy consumption, water usage, and waste management. The Companies Act requires companies to disclose their CSR activities in their annual reports, which can be a part of their ESG strategy.
In June 2020, the RBI introduced guidelines for banks to integrate ESG considerations into their lending practices. RBI published a paper on ESG that advises banks to adopt an ESG policy, conduct ESG due diligence for all lending activities, and report on their ESG performance. The Ministry of Corporate Affairs has introduced the National Voluntary Guidelines on Social, Environmental, and Economic Responsibilities of Business (NVGs), which provide guidelines and frameworks for companies to assess and report on their ESG performance.
NSE and BSE have their own ESG-related initiatives. The NSE has launched an ESG index, which includes companies that meet certain ESG criteria, while the BSE has introduced an ESG reporting framework for listed companies.
The importance of ESG reporting: ESG reporting can help banks in the following ways:
a. Raises Corporate Transparency: ESG reporting broadens organizational disclosure beyond traditional financial metrics and raises corporate transparency on ESG metrics while allowing a comprehensive assessment of the company’s performance.
b. Strengthens Risk Management: ESG reporting strengthens the risk management approach by incorporating sustainability and providing management with useful data for identifying emerging issues and developing appropriate responses that help protect stakeholder value.
c. Promotes Stakeholder Engagement: Companies must identify their stakeholders to effectively engage those that are interested in and affected by the company’s sustainability performance.
d. Improves Communications with Stakeholders: By including non-financial disclosure of ESG, the company provides a framework for measuring non-financial performance. Sustainability reports can be used for benchmarking and assessing sustainability performance with regard to existing frameworks, facilitating peer comparison over time, and enabling communication with stakeholders.
Reporting Standards and Metrics
The firms can report the metrics as specific sustainable reporting frameworks (GRI, CDP, SASB, IIRC, or UNGC) and can make voluntary or involuntary disclosures.
An example of ESG metrics reporting requirements as per BSE for the listed company is below:
Note that the reporting metrics can vary as per the selected reporting framework.
Framework for ESG adoption in Banks
Developing a comprehensive framework for ESG in banking requires a multi-stakeholder approach. A high-level framework for integrating ESG considerations into the operations of a banking institution:
a. Establish a clear ESG policy: The policy must outline commitment to sustainable development and set out its ESG objectives, targets, and action plans. Ensure that the policy is aligned with the overall strategy and values of the firm.
b. Conduct ESG Risk Assessment: Assessment must be done to identify potential ESG risks in its lending and investment portfolios based on relevant ESG standards and frameworks and should consider the bank’s exposure to sectors and geographies with high ESG risks.
c. Integrate ESG Considerations into Credit and Investment Decisions: The bank should develop ESG screening criteria to identify and avoid high-risk sectors and companies.
d. Offer ESG-related products and services: Develop a range of ESG-related products and services in line with relevant ESG standards and frameworks that should meet the needs of socially responsible customers.
e. Monitor and Report on ESG Performance: The bank should monitor its ESG performance regularly and report transparently and comprehensively on its progress towards its ESG objectives and targets.
f. Build ESG Capacity and Culture: Build ESG capacity and culture by providing relevant training and education to employees and integrating ESG considerations into its governance, risk management, and performance management systems.
Finally, the journey toward ESG adoption reflects a fundamental shift in the way firms operate in the modern world, not merely a trend. It is a strategic necessity that aligns businesses with the demands of a fast-expanding global landscape, not only compliance or satisfying regulatory norms. The adoption of ESG principles in the financial sector demonstrates the industry’s commitment to creating positive and long-term benefits. Looking forward, it is obvious that ESG will remain a driving force, altering the financial environment and contributing to a more sustainable and responsible future.
