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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Net Zero Commitment – Is Malaysia in the lead?

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Introduction

A few years ago, Malaysia was under the radar due to human rights issues. However, things are starting to change – with strong adherence to global standards as part of the country’s approach to address the ‘Social’ aspect particularly in dealing with labour standards. It is anticipated that Malaysia is setting its path on the right track under the ‘Social’ aspect particularly with the aim in reducing reliance towards foreign labour from enhanced digitalization and automation, moving forward. 

Now that we have some assurance that the ‘Social’ aspect is heading twards the right direction, the next question is – how about the ‘Environmental’ aspect?

Climate Ambitions

‘Environmental’ aspect is broad but for the purpose of this article, let us narrow it down to the current focus under the Environmental aspect i.e. Climate Change.

There are a lot of discussion around the topic, but one clear response to it for companies across industries is the establishment of Net Zero pathway; a complex and challenging subject for all, globally.

Amongst ASEAN countries, to date, Malaysia has seen to be having the clearest and comprehensive approach towards Net Zero. Neighboring countries such as Thailand and Indonesia have committed to achieve carbon neutrality by 2050 and 2060 respectively, while other ASEAN nations that mostly establish aspirations to the overall Sustainable Development agenda and reduction of greenhouse gas emissions – not specifically on Net Zero.

There is however, a similar trend across ASEAN in regards to the view on Net Zero as a response to combat climate change and emissions. As an example, Malaysia had made a stance to abstain from constructing new coal power plants and at the same time accelerating the retirement of existing coal capacity. Similar approach is being taken with countries such as Thailand, Vietnam and Indonesia that aim to diminish reliance on coal and increase investment in greener and sustainable energy alternatives. 

Based on the report on ASEAN countries Energy Transition Index (ETI), which benchmarks countries performance on their energy infrastructure and systems, and their readiness towards transition to greener and sustainable energy, there is a clear distinction with the ASEAN countries rankings.

Even as a developing country, Malaysia is ranked higher than the southern neighbor, Singapore, which is one of the developed nations and more economically advanced.

One of the observations made was that countries are challenged with the issues of investments in renewable energy (RE) being economically limited and moving at a slow rate. Eventually, and as based on historical data, there is projected reduction in Renewable Energy costs and the return on investments (ROI) surge from Renewable Energy, this would address the current challenges and would eventually scale up such investments. However, we need to note that there is also current contractual obligations from traditional power producers that is unavoidable, but critical to shift towards transition.

Governments would need to step up to facilitate the transition and industry is expecting governments to chart pathways and roll out policies and frameworks to enable the same. For Malaysia, the government had recently issued roadmap on energy transition called the National Energy Transition Roadmap.

National Energy Transition Roadmap

Research shows that nations that have sound ESG and climate agenda tend to create positive impact on foreign investment (FDI) through enhancing its attractiveness via mitigation of medium and long-term risks linked with ESG risks across all aspects. With investors have started to demand ESG criteria integrated into their investments mandates, nations that are aligned on adhered to global signatories or standards such those under the United Nations, would be deemed more attractive  to investors that set ESG compliance within their investment practices. This trend have grown rapidly in recent years and is forecasted to continue.

On 27 July 2023, Malaysia’s Minister of Economy launched the Part 1 of the country’s National Energy Transition Roadmap (NETR 1). Subsequently, on 29 August 2023, Malaysia’s Prime Minister launched the expanded and complete National Energy Transition Roadmap (NETR), which expands on NETR 1. The NETR sets Malaysia’s aspiration of accelerating the nation’s energy transition and sustainable growth agenda. It establishes a pathway to transition the national energy mix, reduce GHG emissions, generate significant investment and employment opportunities, and promote a just and responsible transition.  The NETR identifies 6 energy transition levers to facilitate Malaysia’s transition to clean energy, and outlines the Malaysian Government’s 10 flagship catalyst projects across these levers. The 6 levers are: (i) Energy efficiency, (ii) Renewable energy, (iii) Hydrogen, (iv) Bioenergy), (v) Green mobility, and (vi) Carbon capture, utilization and storage. The expanded NETR outlines 50 key initiatives and five cross-cutting enablers, in addition to the 10 flagship catalyst projects unveiled in Part 1.

Early in 3Q2023, the Malaysia government expedited the implementation of the NETR, to progressively and structurally transition Malaysia from dependency on fossil fuels towards greener alternatives. The implementation will be done across 10 pilot projects with an estimated cost of over RM620 billion. 

The high cost invested is due to NETR that stretches over long-term, but there is potential foreign investment will be made to scale up the NETR substantial implementation deliverables. NETR will place Malaysia at the forefront in green manufacturing within ASEAN Foreign participation and will note only enable Malaysia to reach its climate goals, but also become the green manufacturing hub within the ASEAN region.

As Malaysia strive towards Net Zero, in line with the structured execution of the NETR, there is potential for the country to tackle simultaneous issues it faces a weak currency and declining foreign ownership particularly in the equity market. This is direct impact from NETR that would enable the restructuring the economy and also ensuring strong and sustainable GDP growth in years ahead.

Conclusion

Malaysia is currently seen as a leader in the ESG and this includes on the climate agenda. NETR shall further elevate the country’s position to be amongst global peers and this too will set the expectation for local companies to pursue its own climate agenda and ambition.

 

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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Why company culture is critical for ESG

 

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 Company culture; is something that is not easy to change and manage. But it is common understanding that it determines the enabling success of a company towards achieving its goals and aspirations, including for Environmental, Social and Governance (ESG) agenda.

Human Resources (HR) has a huge role to play in ESG; not merely by providing data for annual Sustainability Reporting, or driving Sustainability-related programmes for the workforce. Even though that ultimately the ESG agenda would most likely come from the Chief Executive Officer or the Chief Sustainability Officer, HR has the potential to ‘make or break’ the whole ESG agenda of a company through culture change of the company to embrace ESG and its objectives.

The fact that we need to understand – building any culture within the organisation is not easy, especially ESG culture. To begin, culture building must begin with the organisation’s authentic identity. What it means by ‘authentic’ is that it must not be based on borrowed or aspired clichés. Therefore, each organisation’s approach on ESG should be unique and integrated in its own context of ambition, and its key internal and external stakeholders’ expectations.

Employees should also have the say in deciding how aspirational they want ESG outcomes to be and how strategy needs to be developed and executed to achieve them. Do they want to be ESG leaders, or followers? Do they want to go beyond regulatory requirements? Each employee functions would have various views and all should be taken as important as the direction being set at the top level. Hence, it is important for organisations to factor in material views and align with the overall short, medium and short term ambitions.

But organisations also need to be abreast of immaterial views that may mislead towards achieving the intended outcomes. Communications is key where effective communications on the oragnisation ambitions should be made accessible and sufficient, where the tone at the top should be set and committed. Various ways can be adopted and with multiple channels to cater to the needs of the stakeholders for engagement whether informally or formally.

To embed an ESG-centric culture, it is important that key behaviours are ingrained across the organisation. This revolves around the materialisation of adopting characteristics and mindsets of long-term focus, collaborative approach, accountability and resilience. This is due to the fact that ESG is constantly evolving and requires prompt adaptation for organisations. With these characteristics, organisations can ensure the transition to an ESG-centric culture is achievable and sustainable.

 

 

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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Net-zero Emissions – What Can Banks Do?

 

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The urgency to slow the effects of climate crisis is higher than ever. According to the latest data, the world needs to reach net-zero by 2050 in order to avoid the disastrous impact of climate change. All stakeholders play a critical role, from governments, consumers and businesses of all sectors, including financial institutions. In fact, banks contribute a huge part to achieving the net-zero target. This is because, the market requires manor investment to mobilise climate action. Concurrently, this needs to be supplemented with the global commitment to shift away from financing carbon-intensive activities and projects.

Nowadays, we are seeing more and more banks are committing towards net-zero targets. However, as the definition for net-zero or net-zero finance has yet to be standardised, there are still many of these banks do not understand what ‘net-zero’ commitment really entail. This brings limitations towards creating the right and relevant changes throughout their business model to ensure climate action is being assigned effectively.

 

Net-zero. So, what does it mean?

The Paris Agreement recognizes the importance for the world to step up in the fight against climate change, including towards achieving net-zero emissions by 2050 and reduce emissions 50 percent by the year 2030.

There are three long-term targets set by the international Paris Agreement on climate change i.e. (i) focus on climate mitigation, (ii) focus on climate adaptation and (iii) focus “to make all financial flows consistent with pathway towards low-emissions, climate-resilient development”.

For financial institutions, banks in particular, the third goal is where banks act a vital role to materialize the objective of the Paris Climate Agreement. It’s paramount to make climate financing a success as banks have a unique and absolute role through investments, lending and advisory services. In line with the Greenhouse Gas Protocol and the Partnership for Carbon Accounting Financials, nowadays, companies would not only need to recognize the environmental impact of their own operations and supply chains, but they need to also be wary of the impact arising from their products and services. For banks, this is tied to their financing activities for instance, though banks nature of operations may not be directly involved in fossil fuels extraction but financing the fossil fuels extraction projects affiliates the emissions associated with the project.

So, back to the discussion on banks’ net-zero commitment, whether it is in alignment with the Paris Agreement or not, they are committing to take a big action to reduce and eliminate the carbon-intensive financing over a period of time.  “Net zero” is achieved when the amount of emissions added is no more than the amount taken away or the achieve the balance between the amount of greenhouse gas produced and the amount removed from the atmosphere.

 

Net-zero Commitment – How Far Have Banks Come?

Even before the Paris Agreement in 2015, some of the major banks have initiated the journey towards Sustainable Finance. The embrace was sparked not only due to the environmental trends but also due to its commercial opportunity. Since the Paris Agreement was established in 2015, we are now seeing more and more banks are following the likes of the JPMorgan Chase, Citibank, Bank of America, Wells Fargo, Goldman Sachs and Morgan Stanley that *pledges towards net-zero.

However, despite the global focus on mitigating climate change impacts, we still have not seen any fundamental transformation towards Paris Agreement from some of the large banks. This is because we are still seeing banks financing and even expanding their fossil-fuel portfolio.

On the bright side, we are witnessing an upward trend of banks promoting values-based banking that highlights that sustainable financing or the shift towards net-zero can also be profitable and at the same time gaining recognitions from various key stakeholders including investors, shareholders and NGOs. These banks also advocates their net-zero journey with the customers and clients and are already becoming the bank of choice for customers and clients that are more keen towards Environmental, Social and Governance (ESG).

 

What Do Banks Need to Do to Shift Towards Net-zero?

Based on industry best practices and experience gathering from bankers across the globe, two common factors have been identified that can help accelerate the transition toward net-zero financing; client engagement and product innovation.

First of all, from the very beginning, banks need to comprehend that committing towards Paris Agreement will enforce changes to the business model, including on how effective and fast it can respond to the climate risks as well as how all of this can be monitored.

Only then banks can take the necessary steps to innovate their product offerings and at the same time proactively engage their clients on the bank can tailor the climate financing journey over short, medium and long-term, to achieve net-zero.

 

Client Engagement

Banks should commit to put in place policies that are ambitious, yet realistic to align their client engagements with the Paris Agreement strategies that centralised towards supporting them towards climate transition. Obviously, as stated earlier, there are still many banks that have the strategy or the affordability to exclude most of its clients that include those in the climate-intensive sectors. Mostly, banks would state a forward limited restriction on some of these sectors such as financing coal.

Banks need to clearly state the expectations that their clients’ climate transition is necessary over a specific period of time, monitor their progress and assess whether it is all in pace with the banks’ net-zero commitment. Banks must also inform clients of the consequences if the clients are unable to meet the banks expectations that might also include an exit strategy.

There are some practical steps banks may adopt in client engagement process to achieve net-zero:

·         Banks should gather and monitor clients’ emissions data from their operations. The availability of data allows banks to develop low-carbon transition plans for their client engagement strategies.

·         Banks should set emission-reduction targets for the client to align to the banks’ net-zero commitment, guided by the completeness of emissions data as well as credible methodologies such as Science Based Targets.

·    Banks should present peer benchmarking for their clients to the industry best practices. This will indicate whether the clients are on the right track of aligning to the banks’ net-zero commitments or require improvements in terms of progress and reporting.

·   Banks should craft structured client-engagement policies to get clients on board towards the transition to low-carbon activities. The policies should also include a realistic timeframe for the transition as well as the standards that will lead to dismissal.

·      Banks should equip relationship managers with knowledge on climate change and the banks net-zero commitments. On top of that, setting the right KPIs on net-zero for the relationship managers could also be implemented to ensure the effective implementation.

 

Product Innovation

Apart from client engagements, banks also have a key role to play in providing the product offerings that can enable their clients towards low-carbon activities, such as green bonds or Sustainability-linked loans. The objective of green bonds is like any other conventional bond issuance, but green bonds raise capital for specific green activities or projects. Green bonds usually involve interest rates that are tied on clients’ activities Sustainability KPIs such as emission targets, pollution index, or even waste management. This is pretty much similar to the concept of Sustainability-linked loans with conventional loans.  

These product could further accelerate the adoption of Sustainability from clients as through these products, companies may benefit lower interest rates and at the same time be more sustainable.

Green products of banks need to be based on international standards that can provide credibility and assurance on the real impact of the clients low-carbon transitions. This is extremely crucial to avoid greenwashing from higher-polluting clients as part of the banks green financing. Hence, the monitoring of the client’s activities and projects and getting a third-party verification on the low-carbon standard alignment may be applicable.

 

Conclusion

Through financing, banks have indirect impact across every sector. The exposure highlights the significance role of banks towards the world economic sustainability. To achieve net-zero, banks cannot move alone. They need to collaborate and work together with businesses towards the common climate objective through series of engagements and delivering climate product solutions.

Regulators and governments must also be in the picture to set the tone of getting all stakeholders on board towards climate-resilient world and economy.

A lot still needs to be done. Banks, in particular, have to up their climate game to achieve this global agenda.

 

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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