Banking on ESG
The Earth and the economy have linked their fates… The bank has a social and environmental impacts on the society.
A group of shareholders (over one hundred individual shareholders and 11 institutional weighing a total of 130 billion pounds) puts pressure on Barclays Bank because they want to use their money for good. The request is simple (in theory): It has asked for the end of financing the fossil energy sector given climate emergency[1]. In fact, the banking sector lagging behind in sustainable development. Indeed, this is the first time a resolution on climate change will be put to the vote at a European bank.
The earth is on edge
More and more studies have shown that integrating ESG[2] (Environmental, Social, and Governance) factors limits risk and increases long-term returns.
Thus, Investors are demanding more and more to consider ESG factors in a positive way. Thanks to this comprehensive approach, companies with higher ESG scores[3] are given more weight. By redirecting capital to those with the highest ESG scores, companies are encouraged to make efforts in terms of the environment, social policy and governance.
Do ESG criteria just give the investor a moral guarantee or are they a source of income?
According to different studies: financial performance is not negatively impacted by high ESG scores[4].
In addition to shareholders, it’s also the regulators — in particular the central banks — who push the banking sector to adopt an ethical behavior in their financing policy.
The European Union maintains the transition to a low carbon economy through sustainable use of resources existing in this optical… The issue of climate change highlights the concept of sustainable development and its application in all sections of society, including business.
Another major event has recently taken place in the Belgian banking landscape: the creation of a new “independent” bank named NewB. NewB[5] is a “Belgian cooperative that is building an ethical and sustainable bank at the service of a society that respects the planet and human rights”.
The NewB’s capitalization campaign is now closed and is currently awaiting notification of the ECB’s decision to grant or refuse bank authorization.
ESG business challenges
When banks lend money, insurance companies provide risk coverage, or investors buy equity, they will all consider how companies manage their ESG issues. This can affect the interest rate on the loan, the insurance premium, the return required on equity, and the conditions attached to it.
Sustainable investing is gaining popularity
More than US$22.8 trillion was invested sustainably in 2016 over half of which was in Europe, with ESG assets rising globally 12% year on year[6]. Many banks promote integrity in the development of the social bond market thanks to Green Bond and Sustainable Initiatives. Indeed, sometimes the banks financing the fossil energy sector. It’s primarily because our economies depend on it… Banks are also the most prone to finance renewable energy in the world. Banking institutions have taken in recent years various commitments to divest progressively sectors such as coal & tobacco. How to support banks in a climate changing world? Green Bonds: A green bond fund dedicated to emerging markets will increase funding for climate-smart investments[7]. Even if the development of ESG (environmental, social and governance or SRI (socially responsible investment) criteria continues, the foundations laid for the future are good.
Written by Younes Fettouh, Consultant @ DynaFin Consulting
[1] https://shareaction.org/weve-filed-a-climate-resolution-at-barclays/
[2] https://en.wikipedia.org/wiki/Environmental,_social_and_corporate_governance
[3] https://www.sustainalytics.com/sustainable-finance/esg-rating-license/?gclid=CjwKCAiAsIDxBRAsEiwAV76N80Ds674waDeMd1kjrHj3gKzDVLIhHrARWPwdhmslO2uJ2eq147RyihoCaOsQAvD_BwE
[4] http://novafi.fr/criteres-esg/
[5] https://www.newb.coop/fr/home
[6] 2016 Global Sustainable Investment Review (Global Sustainable Investment Alliance, 2017)
[7] https://blogs.worldbank.org/fr/voices/12-champs-d-action-pour-s-engager-vers-un-monde-climato-intelligent
