There is increasing pressure on banks to demonstrate their commitment to climate action. As a result, the importance of ESG has also risen. But what exactly is ESG? And how does it create value for banks? Keep reading to find out.
ESG stands for Environmental, Social and Governance. It is a set of standards that help consumers and investors understand an organisation’s impact on people and the planet.
Although ESG and CSR are often used interchangeably, they have different meanings. Corporate social responsibility (CSR) is a self-regulating business model that helps businesses hold themselves accountable for the impact their actions have on employees, customers, communities and the environment. Whereas, ESG provides a framework for measuring success.
ESG reports provide a snapshot of a company’s impact in the following areas:
Environmental: This includes a company’s energy and resources use, waste and pollution. The criteria also helps assess any environmental risks a company faces and how the company manages the risks.
Social: Addresses how a company manages its relationships with employees, suppliers, customers, and the communities where it operates.
Governance: The company’s internal system of controls, practices and procedures.
From mid 2022, ESG reporting will be mandatory for all private UK companies and limited liability partnerships with more than 500 employees and turnover greater than £500m, along with all publicly quoted UK companies.
When banks invest in ESG, they can move one step closer to becoming the kind of socially and environmentally conscious institutions their stakeholders want.
However, it’s important to note that there are limitations.
One of the key challenges with ESG is that it is becoming an end in its self. To secure capital investment, banks need to achieve a certain ESG rating, and that’s it, job done.
For ESG to be effective, it needs independent and credible evaluators that don’t just measure but hold businesses accountable if they fail to make progress on agreed measures.
These issues are not meant to put banks off from engaging with ESG. They are areas of improvement and a reminder that ESG is not a one-size-fits-all solution or a ‘quick fix’, but rather a comprehensive addition to promoting sustainability.
If banks succeed in taking real, tangible action on ESG challenges they can experience the following benefits:
While committing to ESG might seem like a significant investment with no financial return, banks that score higher on ESG reports show higher ROI. Cutting carbon emissions, reducing waste and water use helps reduce operating expenses—[research by McKinsey](https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/five-ways-that-esg-creates-value#:~:text=ESG can also reduce costs,as much as 60 percent.) found it can affect operating profits by 60%. The report also found there is a significant correlation between resource efficiency and financial performance.
Tackling ESG challenges will require your business to innovate. Whether it be through climate credit cards, integrated ESG investment platforms or carbon tracking, businesses can create value through differentiating existing products or creating new products/services.
According to PwC research, 83% of consumers think companies should be actively shaping ESG best practices. Banks need to create sustainable products and incorporate ethical business practice to attract customers and grow the business.
Young workers are driven to find jobs that align with their values. In fact research shows, 76% of Millennials consider a company’s social and environmental impact before accepting an offer. A strong ESG proposition can help companies attract and retain quality employees, and increase motivation by instilling a sense of shared purpose.
Investors are looking for ways to generate returns from socially and environmentally responsible companies, so disclosing data around your company’s impact is a sure way to attract interest from investors. On the other hand, companies that don’t disclose this data can be seen as higher-risk and less trustworthy.
Banks have an opportunity to increase ESG efforts in a way that helps attract customers, increase digital engagement and build loyalty. How? By integrating with Cogo’s carbon tracking tool, banks can empower customers to track, reduce and offset their carbon footprint. This helps to improve the banks’ value proposition while also fulfilling ESG commitments.
For more information on how Cogo can help create value for your bank, get in touch today.