ESG Based Funding in the Finance Industry

13 May, 2021

The crisis that began some time in the February of last year is still not over. Covid 19, which first came to light in 2020 is still affecting millions across the globe, and India especially seems to be in a fix. Although it has been more than a year, the uncertainty of this pandemic still looms, and businesses and enterprises all around the globe have been trying their best to get back to the usual. Many unusual yet interesting collaborations have also come through, all in the name of leaning on each other to take a step forward.

While adapting to the new normal has not been easy, most organisations have taken to the path of recovery, through one route or the other. As supply chains start to rebuild, customer expectations are transforming rapidly. Businesses are past the point where only products or services matter - in a global crisis like this, humanization matters most. Customers, thus, are analyzing company offerings through an additional lens - that of humanization itself. In line with this, it is not surprising to see that most successful enterprises have taken a more people focused approach rather than one that solely targets profits. This is true for investors and shareholders as well - they would rather invest in a business that accounts for proper ESG (Environment, Social, Governance) measures, rather than one that does not give it any importance.

The finance industry has seen some of the most radical shifts in terms of ESG strategies in the last fifteen months or so. In some developing countries, economies have crashed completely, some have fragmented and some are trying to reset and rebuild to handle a global health crisis better. The flip side to this is that the entire world has now been presented with an opportunity to build improved, resilient economic systems that can be proved stable and sustainable in the long run. Getting ESG right is a crucial part of this entire challenge for the finance industry, as economic health cannot be built in isolation, and the finance industry is the backbone of all development.

Before the pandemic hit, ESG factors were considered a choice between impact returns and investing goals, but in the last one year, many ESG funds have outperformed their traditional counterparts. The reason for this is renewed investor interest, improved returns and the promise of long term value. Morningstar research says that 70% of responsible funds performed significantly better in the first quarter of last year. Investors and financial experts have also become vocal about the need for greater adoption of ESG for the move towards a low carbon economy, since that is the only tangible step that will make for a better planet. There is thus immense pressure on financial firms to embed ESG practices within their day to day.

It is important to remember that ESG investing is not just about aligning investment strategies with investor values but also the general principle that ESG-negative behaviors impact investment returns. This is especially true for the banking industry, where professionals deal with customers one on one. People now want to bank with institutions who understand their views and beliefs - this is true typically of younger customers and especially the millennial generations, for whom a brand image speaks more than its offerings. In fact, a KPMG survey states that more than 75% of banking CEOs all across the world believe that their future growth would be determined largely by sustainable policies. This is where ESG needs to come in and help banks and other financial institutions make the move towards greener investments.

Of course, Rome wasn’t built in a day, and this shift will also take time. The first step is to identify the magnitude of the risk that exists if this transition were to come into force. Loans and other financial instruments will have to be revamped to balance green investments, otherwise it will be very easy for the balance scale to tip. But leaders like Goldman Sachs and Bank of America have already taken this leap and made commitments to sustainable investments in 2021. More than that, it is the leadership of these 2 industry giants that are falling in with this approach and understanding its mettle. Now is the time for other leaders to step up and analyse this risk, take a shot and incorporate ESG smartly into their growth plan. New products and developments can wait, but this is the need of the hour, and a critical one at that.

We will see a lot more of trends like green underwriting, carbon neutral banking and sustainable ETFs come into the market. They have already made their presence felt to wealth managers and investors, and we are not far from a time when these will become deciding factors for potential investors to invest in financial businesses. Commercial banking is also set to re-route through proper ESG and sustainability linked deals. Responsible Banking and Finance now has a new meaning, and climate related risks have made their way into the finance industry. One could argue that the need to find specific solutions for climate change related challenges has existed for over a decade now, but better late than never.

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. This is where technology and automation can aid business leaders drive strategic decision making. Smart platforms and a panel of experts who know the sustainability domain in and out can be highly beneficial to drive both, people and profit based strategies. Treeni Sustainability Solutions has been analysing and monitoring risks, devising foolproof sustainability strategies and creating new age reports for global clients to lead them on the ESG path. In a digital first world, data and tech can be a key differentiator for finance and investment based decisions. It’s time for enterprises to become more mindful of their impact on communities, employees, customers and suppliers to ensure a better future for us all.

This article was recently published in NASSCOM.