Environmental, social and governance impact on banking sector (1)
Meeting the Global Sustainable Development Agenda 2030 is the responsibility of everyone, especially the banking sector as a key enabler to inclusive economic growth.
The world population is estimated to be 9.8 billion by 2050. We would have tripled our waste production to 3.4 trillion tonnes, tripled our plastic waste by 2050 with apparently more microplastics in the ocean than fish with more demand for homes, electricity, water and food. This intense growth will come with significant pressure on natural resources as we extract more to meet the demand for growth.
The financial sector as an enabler to economic growth will need to re-imagine how they finance economies to ensure that amplified emphasis on environmental, social and governance (ESG) sensitivities are taken into consideration.
ESG has become a very important tool to measure performance in the financial sector. For investors, ESG is the act of funding businesses that demonstrate positive impact on the environment, support their stakeholders and demonstrate ethical leadership and good governance. Integrating ESG by organisations is the practice of incorporating ESG considerations into decision-making, risk frameworks, corporate practices and governance frameworks.
Incorporating ESG into mainstream banking is becoming integral in assessing the performance of banks not just in meeting compliance, but for investors and Foreign Direct Investment (FDI) opportunities within the banking sector. The evidence in the importance of ESG in the financial sector is evident in the growth of Principles of Responsible Investment (PRI) signatories which increased from 250 in 2006 to almost 4000 assets in 2021 with a total volume of over USD 120 trillion under PRI management.
The advantages of ESG are also becoming evident and well documented with proven advanced performance in financial markets for ESG aligned assets. Evidence of more resilient performance of ESG aligned funds was apparent during the start of the Global Pandemic. ESG aligned funds on the S&P Global market rose between 27.3 per cent and 55 per cent, while the S&P 500 increased 27.1 per cent over that period.
Emergence of sustainability risks
The expectations of stakeholders on the role of the banking industry to manage sustainability issues has increased tremendously in the last decades. The new dynamic is placing consumers at the centre of all transactions because in the new era, it is important that businesses and funders demonstrate how they are meeting human needs and meeting the Sustainable Development Goals (SDGs). Global challenges are becoming multi-faceted in nature, volatile, unpredictable and can lead to severe business disruptions as the global COVID-19 pandemic has shown. The pandemic highlighted the fragmented nature of our business transactions and the importance of embracing ESG as a holistic approach towards business operations where risks are identified and new opportunities unlocked to create competitive advantages and long-term growth that unlocks tangible value for banks and their customers.
Sustainability risks, also referred to as ESG risks, have emerged since the concept of sustainability was introduced in the financial sector. The burden of meeting global goals and cutting greenhouse gas emissions will need the financial sector to play a critical role in the delivery of the global commitments towards safeguarding the environment and building resilient communities. Banks can play a critical role in closing the apparent gap in financing to meet the SDGs and GHG Emissions targets by 2030. ESG aligned assets was over US$30 trillion in 2018, according to recent research by the Global Sustainable Investment Alliance.
ESG investments are expected to exceed US$100 trillion mark by 2030, according to a forecast by Deutsche Bank.
Banks in Ghana are increasingly required to incorporate ESG into risk management frameworks and this has led banks to be more conscious about how the funding they provide is being used. The global pandemic, especially highlighted the importance of corporate good governance with clear evidence of better performance from well governed companies, underlining the fact that social and environmental responsibility can add tangible value to businesses in emerging markets.
In 2019, all 24 banks in Ghana signed up to the Sustainable Banking Principles which outlined a set of seven principles to guide them on how best to integrate sustainable banking into their operations. Also, five Sector Specific Guidance Notes were developed to help them to easily map their risks in sustainable banking with potential impacts and unlock financially viable opportunities in a holistic manner.
Ghana as a key contributor to global commitments is a signatory to the Paris Treaty on Climate Change where Ghana pledged her commitments to cutting greenhouse gas emissions via the Ghana National Determined (GND) Contributions and the 2030 Agenda for Sustainable Development. The former is a legally binding international treaty on climate change which was adopted by 196 parties at United Nations Community of Parties (COP) for climate change in Paris, on 12 December 2015, while the latter provides a shared universal blueprint for peace and prosperity for people and the planet, now and into the future, via a set of 17 SDGs.
The delivery of these critical global agendas will require both public and private sector financing. For banks in Ghana, the availability of ESG linked funds which are geared towards reducing greenhouse gas (GHG) emissions via Ghana NDCs and assisting Ghana meet the SDGs through responsible investments, unlocks opportunities for access to international funding and alignment with opportunities from impact-oriented projects.
ESG aligned banks will have the opportunity to access ESG aligned funding, while increasing their competitiveness via exposure to new opportunities that help Ghana meet its global commitments, thereby reducing the existing gap in funding for climate change and achieving SDGs, especially from the private sector.
The relevance of ESG
Institutional investors especially are now very aware of the growing importance of ESG factors in financial matters and investment decisions. They require banks to demonstrate how they integrate ESG into their lending mechanisms, and risks framework and demonstrate how this plays a role in driving tangible outcomes and impacts while earning returns on their investments. Access Bank, for example, as a leading digital bank has a robust Environmental and Social Risk Management (ESRM) which ensures projects considered for funding are cleared for environmental and social risk before lending decisions are made.