ESG stands for Environmental, Social, and Governance and is a set of standards for company operations that investors use to screen potential investments.
Investors, regulators, customers and banks have begun to realize the importance and meaningful impact ESGs have on organizations. Studies and surveys have found that ESGs are a strong predictor of an organization’s financial success, and they make a powerful difference within communities.
A report compiled by Accenture found that companies that embrace ESGs are 2.5x more likely to be successful. In another survey conducted by Deloitte Global, 59% of respondents said their ESG program had a measurable, positive impact on revenue. For example, The Industrial Bank of China was a small regional bank in 2005 and established itself as a green leader in the industry. In 2016, it became the 7th largest bank in China, demonstrating the powerful impact ESGs can have on financial performance.
Currently, the UK is leading the global conversation and initiative of ESGs. A 2021 survey commissioned by nCino of around 200 banks in UK found that 44% are adopting digital technology to capture and track ESGs. Out of those banks, 37% have already established carbon neutral goals, such as being carbon neutral by 2030. Less than 1% of surveyed banks reported that their organizations were doing nothing to implement ESGs.
European regulators have been blazing the trail for this topic. In 2015, the United Nations agreed on sustainable development goals. The UK is part of the Paris Accord and now there is a new regulation requirement in the EU called the Sustainable Financial Disclosures Regulation (SFDR), which puts a notice on financial institutions to show how they are thinking about ESGs when making lending decisions to customers.
In the United States, the Biden administration rejoined the US as part of the Paris Accord and has the goal of the country being net 0 as an economy by 2050. The US also aims to have climate as a specific security priority and is setting ambitious gas pollution reduction targets.
In Asia, investment in green finance surged in 2020, with 79% of investors in Asia-Pacific that increased their exposure to green and sustainable initiatives. 57% of investors will have incorporated ESGs into their decision-making criteria by the end of 2021.
With respect to financial institutions’ roles with ESGs, these organizations are essentially the facilitators of the world’s economies and play a critical role in risk management and amplifying opportunity in the market when they see one. Financial institutions also have a big say in who gets funded, as they are the market makers and drivers. Along with the benefits of doing the right thing and increasing financial success, financial institutions can make implementing ESGs part of what makes their organization stand out from others by sharing their promises and values for making the world a better place.