How ESG Drives Better Customer Experience and Value Creation in Banking

 

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Introduction

In today’s financial landscape, Environmental, Social and Governance (ESG) principles are reshaping how banks operate, not only to meet regulatory expectations but also to drive deeper customer loyalty and long-term value. ESG is no longer just a compliance requirement; it has become a strategic differentiator that influences how customers perceive and interact with banks.

 

Why ESG Matters to Bank Customers

Customers increasingly expect banks to reflect their values, from climate responsibility to ethical governance and social impact. Research shows that a substantial portion of banking customers want to see strong evidence of ESG action from their financial institutions. For example, a study found that 7 in 10 UK banking customers want evidence of their bank working to reduce its carbon footprint, and more than half of younger consumers would consider switching banks for better ESG commitment.

Moreover, 76% of consumers globally say they would end a relationship with a business that treats its employees, environment or community poorly, highlighting how social and governance aspects can affect customer retention.

These trends are particularly strong among Millennials and Gen Z, who are more likely to factor sustainability and ethical behavior into their banking choices.

 

ESG and Customer Experience: The Connection

At a foundational level, ESG influences customer experience (CX) in several meaningful ways:

1. Trust and Transparency Become Competitive Advantages

Customers are looking for openness in how a bank operates and impacts society. ESG disclosure, whether about lending practices, carbon reduction efforts, or governance policies; strengthens trust. Trust is a core component of customer experience and significantly affects loyalty and satisfaction.

2. ESG Shapes Customer Attitudes and Equity

Emerging research in banking suggests that strong governance, in particular, positively influences customer attitudes and overall customer equity (which combines value, brand and relationship equity). Good governance practices like robust risk management, ethical conduct, and transparent reporting, which all can help customers feel secure and respected by their bank.

3. Authentic ESG Offers Meaningful Engagement

Beyond polished sustainability reports, customers notice real, actionable steps like sustainable financial products (e.g., green loans or ESG-linked savings), community investment initiatives, or programs that promote financial inclusion. These efforts create touchpoints that resonate with customers and strengthen brand relevance.

 

Integrating ESG into Service Strategy

For ESG to uplift customer experience, it must be embedded into core service strategy, not treated as an isolated CSR project. Banks need to:

Align product offerings with ESG expectations
Sustainable finance products (green mortgages, ESG-themed investment options) meet the growing demand for purpose-driven banking.

Communicate ESG achievements clearly
Transparency and storytelling around ESG actions help customers understand what the bank stands for and how it aligns with their values.

Personalize ESG engagement
Using customer data insights to tailor ESG-related communications and services can deepen relevance — enhancing both satisfaction and loyalty.

Foster ethical and inclusive service cultures
Social and governance standards should reflect in how customers are treated with fairness, protection of their rights, and attention to underserved populations.

 

Value Creation: ESG’s Strategic Impact

ESG isn’t just good optics, there’s growing evidence it contributes to financial and strategic value:

·         A major analysis of global commercial banks showed that those with strong ESG performance outperform peers by more than 2% on key financial metrics, suggesting ESG focus can be linked to better overall performance.

·         Enhanced customer trust from transparent ESG practices can lead to greater customer retention, higher lifetime value, and stronger brand advocacy — all fundamental drivers of long-term profitability.

·         Banks that embed ESG within risk and lending frameworks can identify future risks earlier (e.g., climate-related credit risk) and optimize portfolios accordingly, which protects financial health over the long term.

 

Conclusion

In a world where customers are paying close attention to how corporations treat society, the environment and their own stakeholders, ESG has become more than a reporting checklist. It is a strategic lever that shapes customer perceptions, deepens engagement, and supports sustainable value creation.

Forward-thinking banks recognize that delivering an exceptional customer experience today means aligning actions with values  and ESG provides a structured way to do exactly that.

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Banking on Biodiversity: The Next Imperative in ESG Strategy

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While many large corporations have made commendable progress in measuring and mitigating their greenhouse gas emissions, a critical environmental issue remains largely unaddressed: the rapid degradation of nature. From excessive freshwater use to deforestation and biodiversity loss, the ongoing depletion of natural capital poses a profound threat not only to ecological stability but also to global economic resilience.

Scientific analyses, including the Planetary Health Check by the Potsdam Institute for Climate Impact Research, present compelling evidence of this crisis. Of the nine planetary boundaries essential for sustaining life, six—including those governing freshwater availability, land use, pollution, and biosphere integrity—have already been exceeded. This places the global economy squarely in the "danger zone," beyond the safe operating space for humanity.

In economic terms, the stakes are significant. Over half of the world’s GDP is highly dependent on nature—through access to clean water, fertile soil, minerals, metals, and stable ecosystems. The World Economic Forum estimates that continued degradation of natural capital could result in a $2.7 trillion loss in global economic growth by 2030.

 

Defining the Role of Banks in Nature Target Setting

Financial institutions, particularly banks, can play a pivotal role in reversing nature loss by influencing corporate behavior through investment strategies and lending policies. Yet many still face challenges in establishing the kind of science-based, measurable pathways that have become standard in climate-related initiatives.

The starting point for any institution is to identify "nature hot spots"—areas where their operations or investments have the most significant impact on ecosystems, especially in terms of biodiversity.

Generally (may vary across sectors), there are three primary drivers of biodiversity loss:

• Land use change
• Freshwater consumption
• Pollution

While the mechanisms of nature degradation are relatively well understood, there remains a lack of consistent data and transparency around corporate contributions to these issues—and, crucially, the specific actions needed to reverse them. For instance, while deforestation is a well-recognized issue tied to agriculture and mining, clear, sector-specific and actionable targets for halting and reversing it are still rare.

 

Leveraging Global Frameworks for Nature-Positive Action

Banks are not starting from zero. A number of international frameworks provide valuable guidance for setting nature-related targets. The Planetary Health Check helps assess how far we are from a sustainable trajectory, allowing companies and financial institutions to reverse-engineer their goals to help return natural systems to safe operating zones.

Other critical frameworks include:

• The Global Biodiversity Framework (GBF)
• The Science Based Targets Network (SBTN) land and freshwater guidance
• The Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES)
• The Taskforce on Nature-related Financial Disclosures (TNFD) sector-specific recommendations

One tangible example comes from the Planetary Health Check, which suggests reducing freshwater withdrawal in water-stressed regions by 1.5% per year. This aligns with guidance from the SBTN and illustrates how global recommendations can translate into measurable corporate targets.

In Europe, new regulatory instruments such as the European Sustainability Reporting Standards (ESRS)—part of the broader Corporate Sustainability Reporting Directive (CSRD)—are emerging as practical tools for data collection and reporting, offering a useful model for banks and regulators elsewhere.

However, many of these frameworks are broad by design, and global standards must be translated into national policies to be operationally meaningful for banks and businesses. So far, 46 countries have adapted the GBF into national-level standards, but major nature-impacting nations such as the United States, Indonesia, Malaysia, Russia, and several in Africa have yet to follow suit.

 

Focusing on High-Risk Sectors: Taking Mining and Food Systems As Examples

To illustrate how banks can set effective nature targets, let’s examines two high-impact sectors: mining and the food value chain, which includes agriculture, food processing, and beverage industries.

Within these sectors, banks should prioritize three critical areas:

1. Freshwater consumption
2. Land use change
3. Pollution

Setting meaningful targets begins with identifying robust metrics to assess progress and operational readiness. Regulatory pressure is intensifying, prompting some financial institutions to adopt short-term goals focused on reducing negative practices like deforestation and promoting positive interventions such as biodiversity monitoring and land rehabilitation. However, long-term goals focused on broader ecological restoration remain limited.

We categorize nature targets into three key types:

1. Practice-Based Targets
   These encourage or discourage specific activities, such as promoting organic farming or restricting deforestation. While many banks already incorporate such targets into financing policies and client engagement strategies, these often lack clear measurement of outcomes and overlook broader ecological impacts.
2. Impact-Based Targets
   These measure and reduce specific environmental harms, such as water withdrawals or nutrient pollution, with quantifiable outcomes. For example, setting annual water reduction goals in stressed areas or aligning fertilizer use with global industry standards or guidelines. Banks should prioritize these targets to create measurable environmental benefits.
3. State-of-Nature Targets
   These aim to restore the health of ecosystems, focusing on outcomes like biodiversity restoration or watershed health. Though more complex and harder to quantify, they represent the most ambitious and meaningful form of environmental commitment.

 

A Call for Sector-Focused, Science-Based Action

Just as banks began their climate risk management journey—largely in response to regulatory pressure via BNM Climate Risk Management and Scenario Analysis —their approach to nature must now evolve beyond broad commitments toward impact-based targets that are science-aligned, sector-specific, and measurable. This shift is essential for embedding nature into core financial decision-making processes.

Incorporating nature targets into banking practices is not merely an act of environmental stewardship—it’s a critical business strategy. Aligning financial activities with planetary boundaries helps ensure long-term economic viability and strengthens resilience against systemic environmental risks.

Ultimately, nature target setting represents a global call to integrate ecological considerations into financial and economic systems. Achieving this requires robust metrics, enforceable timelines, and coordinated action across industries and geographies.

 

All views and opinions expressed on this site are by the author and do not represent any particular entity or organisation 

 

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Where Values Meet Value: Exploring the Synergy Between ESG and Islamic Banking

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Introduction: Beyond Profits — Rethinking What Really Matters in Finance

Let’s face it — the world of business and finance isn’t what it used to be. For decades, the default yardstick for success was profitability. But today, a growing number of investors, regulators, and even consumers are asking bigger questions: What kind of impact is this company making? How does it treat people? Is it helping or hurting the planet?

This is where ESG — short for Environmental, Social, and Governance — enters the conversation. It’s more than a buzzword or reporting requirement. ESG is quickly becoming a central lens through which financial decisions are made. Banks, asset managers, and insurers are embedding ESG thinking into the very DNA of their strategies — not just because it’s trendy, but because it’s good risk management and good business.

Interestingly, many of the principles at the heart of ESG aren’t exactly new. In fact, Islamic finance has been championing ethical, responsible, and inclusive financial practices for centuries. Its values-based framework — grounded in fairness, transparency, and community wellbeing — aligns surprisingly well with the modern ESG agenda.

So, how do these two frameworks complement each other? And what happens when you bring them together in practice? Let’s dig in.

 

ESG and Islamic Banking: Different Origins, Shared Principles

While ESG might have gotten its official start in a 2004 UN Global Compact report, its essence has been influencing investment behavior for decades. The basic idea is simple: businesses shouldn’t just be financially successful — they should also do right by people and the planet.

• Environmental (E): How a company impacts natural ecosystems — think emissions, resource use, pollution, climate resilience.
• Social (S): How a company treats its employees, customers, and communities.
• Governance (G): How it’s managed — including leadership, accountability, transparency, and ethical practices.

Now, compare this with the core goals of Islamic finance. It operates under the principles of Maqasid al-Shari’ah, which are essentially the higher objectives of Islamic law. These include the protection of life, intellect, faith, family, and wealth — all geared toward a just and harmonious society. Islamic finance prohibits speculation, interest (riba), and investments in industries considered harmful (like gambling or alcohol). Instead, it promotes real economic activity and shared prosperity.

In short, both ESG and Islamic banking frameworks are rooted in accountability, stewardship, and long-term thinking. They're both about balancing profit with purpose.

 

Malaysia Leading the Way: Regulation Meets Innovation

Malaysia is a great example of how this ESG-Islamic finance crossover is playing out in real time. The country isn’t just talking the talk — it’s backing it with solid regulatory moves and financial innovation:

• Bursa Malaysia launched a Sustainability Framework as far back as 2015, nudging listed companies to improve ESG disclosures.
• The Securities Commission rolled out an SRI (Sustainable and Responsible Investment) Roadmap to guide the market.
• Bank Negara Malaysia now expects that by 2026, at least 50% of bank financing should be aligned with climate-friendly or transitional initiatives.

This kind of policy push has created a fertile ground for Islamic financial institutions to lead the way in ESG-aligned products — from sustainable sukuk to green Islamic funds.

 

Sukuk & ESG: Financing with a Conscience

Here’s where theory meets the real world. One of the most exciting meeting points between ESG and Islamic finance is the sukuk market. Sukuk, sometimes called Islamic bonds (though they’re a bit more complex than that), are Shari’ah-compliant financial instruments based on asset ownership and profit-sharing.

Because sukuk are grounded in real assets and ethical use of proceeds, they naturally lend themselves to sustainability-linked financing. In fact, Malaysia issued the world’s first green SRI sukuk back in 2017 — aimed at financing solar photovoltaic plants. Since then, we’ve seen a wave of ESG-themed sukuk from both corporate and sovereign issuers in Malaysia, Indonesia, and beyond.

These instruments are giving investors something powerful: the opportunity to generate returns while supporting clean energy, infrastructure, and community development — all within the ethical guardrails of Shari’ah.

 

Impact Investing: ESG and Islamic Finance Playing on the Same Team

Another space where ESG and Islamic banking make a great team? Impact investing — where financial returns go hand-in-hand with measurable social or environmental outcomes.

The Global Impact Investing Network (GIIN) defines impact investing with four characteristics: intentional impact, evidence-based design, performance management, and transparency. Sound familiar? That’s because Islamic finance is already doing a version of this, guided by principles of justice, tangible asset-backing, and social good.

Islamic finance avoids harmful industries, focuses on long-term partnerships, and insists on transparency — all of which align beautifully with ESG’s focus on responsible investing. Investors are increasingly applying ESG filters to understand the real-world outcomes of their investments — carbon emissions avoided, jobs created, communities served — and Islamic finance can add another layer of ethical rigor to that process.

 

Making It Work: Reporting, Trust, and Innovation

To make this synergy truly impactful, we need more than good intentions. Transparency, standardisation, and trust are key. That means:

• Clear disclosures on Shari’ah-compliant assets and ESG criteria.
• Robust ESG reporting standards, like those from the ISSB or the SC’s SRI Taxonomy.
• Third-party audits and consistent impact measurement to give investors confidence.

And of course, innovation plays a big role too. Fintech, blockchain, and digital platforms can help Islamic finance leapfrog into the ESG era — offering better traceability, smarter contracts, and more inclusive access to capital.

 

Conclusion: A Shared Future for Ethical Finance

At a time when the world is craving more responsible and inclusive financial models, the convergence of ESG and Islamic finance feels both natural and necessary.

Both frameworks remind us that finance isn’t just about numbers — it’s about values, communities, and the future of our planet. They push back against short-termism and encourage us to think long-term, act ethically, and invest in things that matter.

The rise of Shari’ah-compliant ESG products — from green sukuk to impact funds — isn’t just a passing trend. It’s part of a larger shift toward a more grounded, principled form of finance. And as more investors, regulators, and institutions embrace this intersection, we have a real shot at building a financial system that is not only profitable — but also just, sustainable, and truly meaningful.

All views and opinions expressed on this site are by the author and do not represent any particular entity or organisation 

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Sustainable Procurement: Is it worth pursuing?

 

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Introduction

In recent years, with issues such as COVID-19 and with the current volatile market, the resilience of supply chain is deemed more critical than ever. Companies have started to integrate Sustainability into its operations but the focus now is to ensure it is expanded across its value chain or in other words; procurement.

 

Sourcing from suppliers that are sustainable, may help companies to mitigate risks arising from supply disruptions due to environmental events or regulatory changes. Moreover, companies that mitigate social and environmental issues across the value chain will help to mitigate reputational risks.

 

It easier said than done

Integrating Sustainability across the value chain requires a lot of collaborative approach and sound governance and processes – and this is also complex as companies are dealing with shortages in tools, data and internal capabilities. This is backed by the findings from a study by McKinsey. According to this study, one of the exercises indicates that, 70% of the sample informed that their companies is not aware of where Scope 3 emissions were generated in their value chain. Apart from that, 90% of the sample highlighted that they face difficulty in identifying the right actions to move the needle on ESG topics. Also, in terms of target setting, almost 75% highlighted that they face issues in this area.

 

The SMEs are the backbone of the economy – globally they represent up to 90% of businesses. The SMEs are also facing the scrutiny and pressure from all angles to adopt sustainable practices and operations. This is due to their supply chain ecosystem that includes large corporations that are setting higher ESG standards and requirements.

 

Logically, implementing sustainability is always a good cause for any organisation, regardless of their size. While larger corporations have been able to progressively integrate ESG into their business, many SMEs struggle in their journey to do the same, due to a lack of technical skills, knowledge and capital.

 

 Is it worth it?

Not only sustainable procurement results in good reputation for the company, but it can also have a positive impact on the company’s relations with its stakeholders, especially the customers and investors. These two stakeholder groups are now more focus than ever to scrutinise ESG considerations integrated across companies’ supply chain and will support those companies that have a clear and practical sustainable procurement plan and monitoring. Customers and investors would also be more likely to do business (over a longer period of time) with companies which have lower exposure towards non-ESG compliant suppliers.

 

Current and potential employees are also looking into how serious companies are towards sustainable procurement, especially those that value environmental and social responsibility. Employees nowadays do not want to be affiliated with companies with poor sustainability practices in its procurement process and management. Additionally, employees would also expect companies they are working for to also have a sound and robust sustainable procurement strategy and plan.

 

Sustainable procurement is not all just about environmental and social benefits, but can also have potential economic value. Companies with good sustainable procurement practices will have competitive edge, and can reduce costs, improve efficiency, and gain a competitive advantage over their peers in the same sector.

 

On top of that, sustainable procurement would also improve supplier relations as well as business continuity. Early adoption and transition in sustainable practices ahead of mandatory regulations or imposed by specific jurisdictions, can benefit organisations in securing and building networks of quality and sustainable suppliers as part of its value chain.

 

Conclusion

Sustainable procurement is expected to be a norm moving forward. We are seeing more pressure from sustainable companies to embed Sustainability across its business operations. Engagement with suppliers on Sustainability are seen to be intensified and more and more suppliers are also on the look out to obtain relevant certifications, tools and resources towards being more sustainable. More or less, both organisations and suppliers are aware that sustainable procurement will bring economic benefits and would remain relevant and competitive in the market over the long term.

 

All views and opinions expressed on this site are by the author and do not represent any particular entity or organisation 

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Green Talent – key towards net zero

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In the previous article, we talked about why a company culture is important in the overall ESG agenda. Now, let’s talk a little bit more specific. What is the role of the workforce on the current ESG buzzword i.e. climate and net zero.

Companies need to understand that Human Resources (HR) play a key function to ensure a successful business transition towards net zero.

The race towards net zero and the greening of the economy has started and will continue to have significant impact on the on employment and the required skillsets. Just like other capitals, investments in human capital in building a talent pool of green skills is important towards enabling a company to transition towards low-carbon, resource efficient and green operations.

Green skills do not sit within a specific sector. It covers a broader spectrum where it applies to a wider set of current functions and management levels. Currently, the industry is witnessing a ‘green enrichment’ job descriptions where skillsets and knowledge related to ‘green’, net zero, low-carbon, green products, renewables and many more, are becoming a common requirement.

On top of that, the industry is also seeing new emerging jobs catered for green skillsets especially in the area of renewable energy and energy efficiency and green technology.  

Green skills should also be supplemented with generic skillsets such as stakeholder engagement, adaptability, risk management and problem solving as these skillsets required by a green talent.

The demand for green talent is on the rise and the competition is stiff. According to multiple studies, the scarcity of green talent is across all industries and sectors. For instance, a recent survey from Funds Europe highlighted that more 70% of financial services firms viewed that they are facing ESG skills shortage, and only a small minority of firms (13.5%) are providing training on the risks resulting from climate change, which exacerbates the challenge.

Without a doubt, HR must up their game towards building the required skillsets and capabilities of green talents as this will ensure sustainable succession planning to meet companies’ green transition.

Some of the practical steps to be taken as guidance are as follows:

 

Green Talent Competency Assessment

HR needs to have a clear definition of the requirement criteria for green skills and knowledge in order to conduct a strategic and purposeful green skills competency assessment. There are a few frameworks out there such as the one developed by Bursa, that could guide HR to develop the sets of criteria specifically for green (and overall Sustainability) talents, but HR needs to further refine based on the company’s business model and its green ambitions and goals.

 

Green Talent Roadmap

HR should craft a structured resourcing plan including talent up-skilling pathways for identified employees critical for moving the green agenda of the company. This resourcing plan should be approached from within the company (internal) and from outside of the company (external) e.g. identify key employee groups, retain and attract green talent with green skillsets.

 

Green Talent Capability Building

Employee development should be an on-going process by leveraging on vocational education, training modules, learning programmes, green certifications, as well as on-the-job training to develop and strong talent pool with green talents and succession planning. This should be across different levels i.e. awareness, fundamentals, intermediate and advanced.

 

Monitor and Respond

The initiatives to up-skill the green talents need to be monitored in terms of its effectiveness. Are they meeting the requirements for a specific function? How is the participants’ feedback? Is it enough? Is it too basic? Are there any other new programmes that need to be rolled out? Does the overall plan need to be revamped? These are some of the questions HR needs to monitor and to eventually respond in order to address any gaps and improvement plans to ensure successful execution of develop green skillsets.

All views and opinions expressed on this site are by the author and do not represent any particular entity or organisation 

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Role of Treasury in ESG

 

Role of Treasury in ESG

 

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Introduction

Sustainable Finance is widely known as the consideration of environmental, social and governance (ESG) factors into financing (including investing) and decision making processes. For the financial sector, ESG factors, which are broad in scope, have not been traditionally part of standard financial analysis. However, now, more than ever, ESG integration into financial analysis has not only become relevant, but critical.

 

The difficult first step

Regardless of sector or region of operations, ESG integration into business model has always been a challenge. Unfortunately, for treasure, this is even harder. This is because treasury is partly tied to the organisation’s policies which means ESG integration into the treasury functions are not 100% control by treasury directly.

However, there are a few key initial steps that worth to be taken; and it can start with an acknowledged framework that maps the potential contributions of treasury to ESG factors and guides its integration, and this can be based on a few established frameworks that can meet the above objective.

But, there hurdle here is; what framework to adopt as the regulations and standards are still unaligned globally. One of the ways to approach this is to adopt the common and most widely accepted framework such as the United Nations Sustainable Development Goals (SDGs). This shall enable clear linkages to the goals that contribute to each and/or combined elements of ESG. Another option is the green, social, and sustainable bond principle frameworks of the Climate Bond Initiative (CBI).

By adopting these frameworks, it provides guidance and directions to evaluate ESG eligible project financing.

Contributions of treasury to ESG

Green financing is not the only way corporate treasury can contribute towards supporting sustainability. In terms of its operations, sustainability can be achieved through digitalisation in its processes, record management and bank statement management. Innovative technologies like robotic process automation, blockchain, and artificial intelligence should also be implemented to increase efficiency in an ESG friendly ways. These initiatives will cover the environment impact of sustainability. In terms of social, corporate treasury should encourage diversity, equity and inclusion by providing equal opportunities for everyone and creating an inclusive working environment.

On top of that, the role of treasury can be further more extensive. Firstly, treasury can set ESG-related requirements to be met by new business partners. Secondly, for existing business partners, treasury can create advocacy and awareness for them towards complying with these requirements. Treasury can also build credible relationship with credit rating agencies focusing on the areas of ESG.

A structured model should be established and implemented to ensure an effective integration of ESG in treasury. This model should include a clear overview of potential treasury contributions to ESG factors, once they have been selected, and the building blocks needed to achieve those contributions.

 

Monitor and Measure

It is important that the progress of ESG integration in treasury is monitored and tracked in a structured manner and also using credible metrics and benchmarks. However, we need to acknowledge that development of metrics and benchmarks for ESG integration tracking is still in the nascent stage and it comes with some complexities, in terms of identification of types of indicators, as well as standardization. Nonetheless, it still can be done effectively with consideration of a few key approaches.

First and foremost, it must be made clear on the mapping of each treasury contribution, and this should be done separately. From here, metrics and benchmarks need to be developed separately for each contribution based on materiality to the company and stakeholders. Apart from that, the metrics and benchmarks should always be updated as the ESG integration matures so there will be efforts towards improvements.

Examples of product offerings and operational metrics and corresponding benchmarks are:

·         Assessing external review of Sustainable Financing framework to measure the perceived the ESG elements of financing

·         Tracking digital workflows, through a digitalised form processing and records ratio

·         Measuring  the increase in output of a processes in place to monitor the effectiveness of technological innovation

 

Conclusion

ESG as a whole is constantly evolving, and so is the role of treasury in ESG. It is important for the treasury team to keep up to date with the latest development of ESG, particularly on Sustainable Finance as well as how operations c

 

All views and opinions expressed on this site are by the author and do not represent any particular entity or organisation 

 

 

 

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Sustainable Finance – It is here to stay. Here’s why.

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Introduction

Back then, it is known that investors focus mainly on financial returns, regardless the impact their investments have on society and the environment. Now, it is a different story. Environmental and social issues continue to be the main highlights of today’s news globally and there is a significant rise of interests made from stakeholders including the investors. 

Apart from that, in many case studies, sustainable funds are observed to be outperforming conventional funds, such as during the covid-19 pandemic period. So, this creates a win-win opportunities situation for investors to reap financial return and at the same time do good for the society and environment.

 

What is Sustainable Finance?

The short definition of sustainable finance is investment or financing that considers environmental, social and governance (ESG) factors into account on top of financial returns. Terms such as green financing and also social impact financing also constitute the sustainable finance spectrum; the former is related to finance activities that stimulate economic growth while simultaneously reduce environmental risks and impacts, and the latter is related to the positive impact created in regards to specifics group of the society.

 

Why is it a big deal?

The struggle to combat climate change impacts varies from ecosystem and biodiversity restoration as well as how we manage natural resources. But this is not enough. Sustainable finance can be the answer to get the win over climate change impacts. Globally, the economy requires up to USD800 billion each year to mitigate the climate crisis by 2030. This is a huge amount. Thus, private entities and public entities around the world have to collaborate on the sustainable finance agenda.

Financial institutions are the key players when it comes to sustainable finance through capital allocations towards sustainable projects and programmes. Financial institutions can provide critical financial support for companies towards sustainable investments and operations.

The role of financial institutions in sustainable finance has been on the rise. On top of that, there is a growing trend for companies to come up with business strategies and commitments that are linked to sustainability i.e.to create positive impact on the environment and society. This results in rising demand for investment through sustainable finance.

Though financial institutions have a vital role to play, sustainable finance initiatives also depend on the involvement of non-profit organisations (NGOs), regulators, investors and governments. Innovation for sustainable finance product offerings depend highly on the alliance of all these entities.

 

Companies are getting serious with sustainable finance

Sustainability in general, brings significant values for companies. Furthermore, there has been greater expectations from employees, to investors, clients, and regulators towards the integration of ESG factors into business model.

Employees demand for a more sustainable business working environment and operations, especially the younger workforce where sustainable values on top of attractive packages are core for them to stay with a company. On top of that, employees also want to affiliate working with companies that invest in projects and programmes through the funding from sustainable finance.

Investors and clients also want to move towards ‘greener’ portfolios where financial returns would also come with positive environmental impact. They want that ‘added’ value so they know they are making a difference in this world.

Regulators all around the world are becoming more and more aggressive in setting their expectations across all sectors to adopt sustainable business.

All of this means that, there is both opportunities and risks elements of sustainability integration for companies which indicates that sustainable finance is important for key and external stakeholders for a company.

That is why, sustainable finance is here to stay.

 

All views and opinions expressed on this site are by the author and do not represent any particular entity or organisation  

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The Main Challenges in Climate Reporting and How to Tackle Them

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Companies have been disclosing on how their operations impact the climate and this information is easily accessible in companies’ websites and public reports. But, what about the information regarding the impact of climate risks to companies? Recently, this topic is being discussed at a greater length and the demand for companies to disclose it has risen. This is due to the fact that the direct physical impacts of climate change risks are exposing companies’ operations to complex operational risks. On top of that, this demand is also driven by the indirect and transition climate change impacts, including introduction of new policies and regulatory requirements to shift towards a low carbon economy, as well as changes in customers demand on product and services that are more ‘climate friendly.

Reporting on the impact of climate risks to operations represents how the company is both managing the risks as well as creating business opportunities for the sustainability of the business.

In response, stakeholders are demanding for greater transparency on the climate impacts on companies’ financial performance, including future performance.

Adoption of the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD) recommendations is also increasing, and we are seeing this across the world. The recommendations of TCFD have been driving companies to enhance the holisticness of climate disclosures. The TCFD sets out a framework that enables companies to disclose their climate risk profile and integrate it into mainstream filings. This information provides regulators and investors with a meaningful climate-related risk information to better assess how companies manage climate change impact and how they respond over short, medium and long term.

 

TCFD – Current Progress

The TCFD recommendations are widely accepted by organisations from various sectors, including investors, associations, as well as policymakers. All have expressed full support towards the adoption of the TCFD recommendations.

However, the implantation of the TCFD is deemed as the main challenge, from getting started to improvements the adoption. CDP and Marsh & McLennan Companies’ Global Risk Center in its research has reported that the implementation challenges faced by organisations include the following three key areas:

·         Securing leadership buy in for a wider approach to climate risks

·         Overcoming siloed risk-management processes

·         Limited experience with climate change scenario analyses.

 

Securing leadership buy in

The Board and Management need to properly define and evaluate the impact of climate risks to the balance sheet of the company. In order to do so, Board and Management should expand their horizons of their considerations towards climate related issues and trends. It is reported that more than 80% of companies’ Board provide oversight on climate issues. However, it also reported that only 10% of companies actually incentivise Boards to prioritise climate risks, and even lower percentage of Boards consider climate risks as a top 5 risks affecting the company within the next 5 years. This clearly contradicts with the -Global Risk Report by the World Economic Forum which ranks climate- and environment-related threats as the most likely and most damaging over the next decade. 

 

Risk management are working in silos

Conventional risks can be easily isolated and addressed with standard risk-management process, and this will not pose much issues to a lot of businesses. However, it is a totally different ball game when it comes to more complex risks embedded in interconnected systems, such as nature-related risks and climate risks including on risks pertaining the transition to a low-carbon economy.

Climate risks for example, are now considered one of the biggest risk topics being discussed. According to CDP, only 34% and 28% out of more than 1,500 companies, respectively, are linking physical risks and regulatory and transition risks associated with climate change beyond six years.

For investors, organisations and other stakeholders that are assessing the mid- or long-term view, limited and short-term climate change impact analyses will not be adequate in providing them with robust information on potential direct physical and transitional risks from climate change.

This is certainly a complex issue. On top of that, another research has found that the complexity also rises from the lack of stadardisation and clarity on risk definitions, as well as which function within the organisation that is accountable to manage them. Climate risk management should not fall under under the sole responsibility of one individual or a function which in many cases – the sustainability team. Responding to climate risks will require broad ownership, understanding and collaboration across the organisation on climate risks and opportunities and how they relate to financial impacts in the long run.

 

There’s not much experience and cases on climate change scenario analysis

Based on TCFD’s recommendation, companies should describe the potential impact of different climate scenarios, including a 2-degree Celsius scenario, on businesses, strategy and financial planning.

The fact is, companies encounter a lot of challenges and potential barriers in translating climate scenarios to integrated financial analysis. Various types of climate scenarios and widely varied outcomes result uncertainty to determine which climate scenarios are appropriate to use and to translate into meaningful financial impact analysis. Currently, the developed climate scenario models were established mainly for academic and economic use cases, but not financials. Existing scenarios require input and judgment from experts across the organisation but the other challenge is that for many cases, the process involves a lot of very educated guesswork and not everyone guesses in the same wavelength as others.

Companies are required to find ways to integrate the analysis into current strategy and scenario planning and risk assessment. Subsequently, companies are required to provide linkages of the scenario impacts to future business strategy and performance. Data is one of the main obstacles as there is lack in historical and factual data to link climate impacts to financial performance.

TCFD’s recommendations will likely to be via phased approach and require time especially for companies that are new in their overall Environmental, Social and governance (ESG) journey. There is also indeed, the need for a clear and practical reporting framework.

The long-term horizons of climate risks and opportunities typically extend beyond the scope of business planning and one thing that needs to be highlighted is that normally, business works on a short-term cycle, hence, quarterly financial reporting is the common practice. For financial stability, the horizon is extended, but typically only to the outer boundaries of the credit cycle — about a decade. This brings to another concern – by the time climate change becomes the defining issue for financial stability, probably it will be too late for a response, unless, drastic actions are taken right now to evaluate and disclose climate-related factors.

 

Conclusion

Without a doubt, assessing and reporting on climate impacts – risks, resilience, opportunities is challenging. However, by undertaking it, it provides the edge for companies to get the upper hand to face the adversity arising from climate change. This, is key for a truly, sustainable future.

 

All views and opinions expressed on this site are by the author and do not represent any particular entity or organisation 

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Why We Need to Avoid Greenwashing

 Photo courtesy of Pexels, for illustration purposes only

 

Recently, the authorities of the United States of America began a probe into allegations that a German multinational investment bank and financial services company that had inaccurately overstated its Environment and Social banking product offerings.

A fund subsidiary of the company is under high scrutiny over claims of its negligent approach towards establishing its Environmental, Social and Governance (ESG) investments criteria.

Authorities including the United States Securities and Exchange Commission have begun the investigations that had directly caused the German bank of losing 2.5% of its market capitalisation.

This is not the first occurrence of similar consequences. A few years ago, we have learned the same for a case regarding emissions-cheating scandal of a motor vehicle manufacturer, also from Germany. The motor vehicle company seemed to suffer from pretty severe reputational impact on top of costing the company over 30 billion dollars in penalties, fines as well as lawsuits restitution and settlement since 2015.

The whole Financial Sector should be triggered with the investigations of the German bank. The precedence of the investigations might also mean there is very likely there may be more scrutiny on ESG-related data and disclosure expectations from all banks.

Greenwashing will mislead stakeholders on how ‘sustainable’ banks are in terms of its practices, Environmental and Social products, or its governance.

Banks are very much aware that ESG is on top of the agenda across the industry. Around the globe, private and government sectors, investors and even regulators are gaming up on their ESG ambitions.

The pressure to be the ESG leaders are high for the banks to highlight to internal and external stakeholders. In doing so, overstatement and exaggeration of ESG performance and practices would likely to occur. This expose greenwashing risks towards the Banks.

Many companies nowadays self-acknowledged that they are sustainable. These companies should be cautious on these claims and ensure how they implement and how they report their Sustainability progress really reflect to the actual practices. This can be managed if the companies’ leadership are skilled and experienced on the Sustainability integration status within the organisations. If not, leaders of these companies are risking their jobs on the line, especially now there has been increased scrutiny from regulators and authorities on the transparency of companies’ Sustainability disclosures.

Apart from the impact towards the leadership roles, companies will suffer loss of revenue and investment value, loss of employees’ confidence and even reputational damage to cause loss of social license to operate.

 

Conclusion

The solution to this is companies must identify the current Sustainability knowledge and practices gaps within their organisation and take the necessary actions to address them in a way that are aligned with their business strategy.

It is understandable that companies would leverage on Sustainability reporting as a marketing tool. But it needs to be backed up with credibility. Companies are encouraged to obtain external reviews and assurance on their Sustainability data prior disclosing to the stakeholders.

This will ensure all Sustainability-related practices, targets and achievements are reported whether internally or externally, to be accurate and not misleading.

 

All views and opinions expressed on this site are by the author and do not represent any particular entity or organisation 

 

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