ESG – a critical issue, but is it bank’s licence to operate?

What you need to know:

ESG has become a critical business issue not a niche activity and has become a licence to operate. More importantly actions on ESG factors by corporate bodies will be a critical contribution towards achievement of Sustainable Development Goals (SDG).

ESG is an umbrella term for the environmental, social and governance issues that impact economic activity. Though not new, its relevance has now reached a tipping point where organisations cannot afford to be inactive. Investors are requiring a greater level of transparency, governments are increasing action on ESG factors, activist shareholders are demanding corporate action on non-financial factors, and conscious consumers are choosing to act with their wallets. ESG has become a critical business issue not a niche activity and has become a licence to operate. More importantly actions on ESG factors by corporate bodies will be a critical contribution towards achievement of Sustainable Development Goals (SDG). And the good news is, despite presenting risks to businesses there are also plenty of opportunities which are also emerging.

As a starting point banks should develop comprehensive strategies for ESG factors that encompass both business prospects and risk management aspects. This will enable banks to tap into emerging business opportunities as well as expand their risk management framework to capture all type of risks envisaged. A typical question at strategy formulation stage is as to what steps are being taken to attract sustainability financiers? Green/Sustainability bonds investors have specific requirements which warrant sufficient preparation. Globally, International Capital Market Authority (ICMA) and Climate Bond Initiative (CBI) provide detailed guidelines on issuance of sustainability bonds. In March 2022 the Dar es Salaam Stock Exchange (DSE) issued specific rules related to issuance, listing and reporting of sustainability themed/labelled financial instruments.

How is the bank going to factor in ESG factors in product development as well as pricing? As main financiers of businesses, banks are uniquely positioned to influence the ESG agenda by designing products promoting sustainable practices. How is the bank embedding financial inclusion in its business strategy? It is imperative for any responsible bank to target the underserved part of the society as part of its wider strategy. Which segment of customers in the bank’s loan portfolio is likely to be disrupted by climate risks and consequently result in default? Lending processes ought to be revisited to address emerging credit risks going forward. Are there existing regulatory changes or expected soon which may directly affect the bank’s operations, customers or other stakeholders? Does the bank foresee significant disruptions to service providers due to ESG risks? Are boards adequately equipped and engaged to provide the required oversight on ESG strategy implementation? Are we committing the right budget to support implementation?

Reporting is the last step but of equal importance if not more. The reporting landscape is constantly evolving with new disclosure requirements expected to emerge. In November 2021 the International Financial Reporting Standards Foundation formed a new sustainability disclosures board, known as the International Sustainability Standard Board (“the ISSB”). The intention is for the ISSB to deliver a comprehensive global baseline of sustainability-related disclosure standards that provide investors and other capital market participants with information about companies’ sustainability-related risks and opportunities to help them make informed decisions. The ISSB has issued exposure drafts for two standards and invited public feedback and comments. Locally, the DSE have now also included requirements for the annual reports of listed entities to cover their activities and practices on ESG factors.

ESG – a critical issue, but is it bank’s licence to operate?

What you need to know:

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