5 ways ESG creates value for banks

ESG definition

ESG stands for Environmental, Social and Governance. It is a set of standards that measure a company’s impact on the environment and society, as well as the quality of its governance. 

CSR vs ESG

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 impact. The primary objective of ESG reporting is often to satisfy the information requirements of key stakeholders. 

What is ESG reporting?

ESG reporting is the disclosure of environmental, social and corporate governance data. By disclosing this information, a business’s progress related to these three areas can be examined against benchmarks and targets. 

It is designed to provide full transparency so stakeholders, like investors and consumers, can make better-informed decisions. 

Is ESG reporting mandatory?

UK

In April 2022, the UK enacted two mandatory ESG disclosure laws. These regulations require companies that have more than 500 employees and/or a turnover of more than £500m to provide climate-related financial disclosures in their strategic report.

New Zealand

New Zealand has made climate-related disclosure mandatory for large publicly listed companies, insurers, banks, non-bank deposit takers, and investment managers from the 2023 financial year.

EU

Large public-interest companies with more than 500 employees within the EU have to disclose ESG information under the Non-Financial Reporting Directive (NFRD). 

US

There are currently no mandatory ESG disclosure requirements in the US, but this is changing. In March 2022, the US Securities and Exchange Commission (SEC) proposed climate-risk disclosure requirements, expanding publicly traded companies' annual reporting requirements. 

Asia

While Malaysia was the first country to introduce mandatory ESG reporting standards for all publicly listed companies in 2016, Asian countries tend to lag behind in ESG reporting regulations. Most countries have ‘comply or explain’ policies for listed entities, meaning companies that don’t follow ESG recommendations must disclose this information and explain why. 

It’s important to caveat that while legislation currently only applies to large companies and financial institutions in certain countries, it also affects the thousands of small businesses in their supply chains as they are required to disclose data.

Why is ESG important for banks?

Besides policymakers, stakeholders are also demanding transparency about banks’ environmental impact. Our research revealed that 7 in 10 UK banking customers want to see evidence of their bank taking action to reduce their carbon emissions. This is even more significant among younger consumers; research by Bank of America revealed that 56% of Gen Z banking consumers would switch banks to one more committed to social and governance (ESG) issues. Clearly, ESG reporting allows banks to improve their business reputation and customer relationships. 

Investors are also increasingly demanding transparency. By reporting on ESG performance improvements, banks signal to investors that they can mitigate risks and generate sustainable long-term financial returns. 

Furthermore, ESG reporting uncovers hidden risks and opportunities to reduce carbon emissions and increase efficiencies. And it provides a framework for banks to confront the complexities of scope 3 emissions.

How ESG can create value for banks

If banks succeed in taking real, tangible action on ESG challenges, they can experience the following benefits:

‍Reduce costs

A McKinsey report found that cutting carbon emissions and reducing waste helps lowers operating expenses and can affect operating profits by 60%. The research also shows a significant correlation between resource efficiency and financial performance. So while committing to ESG might seem like a substantial investment with no financial return, banks that score higher on ESG show higher ROI.

Improve value proposition

Tackling ESG challenges will require your bank to innovate. Whether through climate credit cards or carbon tracking, businesses can create value by differentiating existing products or creating new green products/services.

Enhance brand reputation

Customers increasingly value banks that take steps to reduce their environmental impact. Research shows that 64% of consumers would choose, switch, avoid or boycott unethical brands. So, ESG reporting can communicate to conscious consumers your company’s dedication to environmental and social issues, boosting brand reputation. 

Attract and retain employees

Young workers are driven to find jobs that align with their values. In fact, research shows that 76% of Millennials consider a company’s social and environmental impact before accepting a job offer. Therefore, a strong ESG proposition can help companies attract and retain quality employees and increase motivation by instilling a sense of shared purpose.

Gain investment

Investors are looking for ways to generate returns from socially and environmentally responsible companies, so disclosing data about your company’s impact is a sure way to attract interest from investors. Companies that don’t disclose this data can be seen as high risk.

Conclusion

Banks have a unique opportunity to accelerate climate action and lead the necessary change to meet our global climate goals. This type of leadership starts with transparency.

Banks that want to lead the way, need to get ahead and disclose their carbon emissions. The financial institutions that succeed in doing so, will reap the rewards. ‍

For information on how Cogo can help create value for your bank, get in touch today.

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