New Delhi: E.S.G. stands for Environmental, Social and Governance in organisations. It is an approach to evaluating the orientation towards social goals to make the world worth living. ESG compliance ultimately maximises profits for shareholders. As a significant non-financial expense impacting financial performance, ESG factors have fast become policy drivers in the boardrooms to enhance image and market capitalisation. ESG compliance now decides the long-term winners in the businesses. Sustainability is no longer about doing less harm; it’s about doing more good.
ESG issues are highly pertinent to asset management for Insurance and Banking. The ESG issues need to be considered as potential sources of risk as they can impact a borrower at any point. We are not above nature; we are a part of it. The more we expose nature to risk, the more we damage ourselves.
The Reserve Bank of India set up a Sustainable Finance Group (SFG) to lead the regulatory initiatives in climate risk and sustainable finance. The Group has laid the rules for the appropriate disclosures for banks, propagating sustainable practices, and mitigating climate-related risks in the Indian context.
A detailed survey by the RBI to disseminate the approach to climate risks, level of preparedness and progress of leading Banks covering the entire 12 Public Sector banks reveals startling under-preparations. The key observations from the survey are as follows:
1. Board-level engagement and responsibility:
Board-level engagement on climate risk and sustainable finance needs improvement. In about a third of the surveyed banks, responsibility for overseeing climate risk and sustainability initiatives is still required to be assigned. Only a few banks have included climate risk/sustainability/environmental, social and governance (ESG) related key performance indicators (KPIs) in the performance evaluation of their top management.
Most banks needed a separate business unit or vertical for sustainability and ESG- related initiatives. Only a few banks had a strategy for embedding ESG principles in their business, scaling up their sustainable finance portfolio and incorporating climate change risks into their existing risk management framework.
2. Risk management:
Almost all the surveyed banks recognised the urgency of the issue, and most considered climate-related financial risks to be a material threat to their business. Physical and transition risks were seen as the primary sources of climate-related risks. Some banks focus on social and governance aspects, apart from climate and environment-related risks, while evaluating credit proposals above a certain amount. Others are also attempting to quantify the amount of their loan and investment portfolio susceptible to such risks.
3. Transition to low-carbon exposure:
Most surveyed banks have decided to reduce their exposure to gradually high-carbon emitting/polluting businesses in the coming years. A few banks have mobilised new capital to scale green lending and investment or set a target for incremental borrowing and investment for sustainable finance. Most banks have launched a few loan products to tap the opportunities from climate change. At the same time, a few have also found green deposits to scale up lending to environment-friendly businesses.
4. Moving towards a low-carbon environment in banking operations:
Most banks have initiated measures to decrease the absolute carbon emissions from their processes and increase the proportion of renewable energy in their total sourced electricity. A few banks have either announced time-bound plans or intend to develop a roadmap over the next 12 months to become carbon-neutral.
5. Capacity building and data gaps:
Most banks are looking at capacity building to better understand the financial implications of climate risk. Banks also felt that the available data needed to be more sufficient to appropriately assess climate-related financial risks. The processes and methodologies must be sufficiently developed to measure and monitor these risks.
The responses to the survey indicate that although banks have begun taking steps in the area of climate risk and sustainable finance, there is a need for concerted effort and further action in this regard. The insights from this exercise are expected to help in shaping the regulatory and supervisory approach of the Reserve Bank to climate risk and sustainable finance.
Investors increasingly scrutinize the ESG risks and opportunities; organisations now risk losing access to capital and debt markets if they cannot demonstrate a rigorous approach to non-financial performance related to ESG. Banks must align their climate-related financial disclosures with internationally accepted frameworks to remain relevant internationally with various stakeholders.
Rightly said, “Our commitment to ESG, reflects our commitment to the world.”
About the author
Mr. Hargovind Sachdev is an Ex-Banker, GM(Retd) of State Bank of India. Has over 39 years of experience in banking, having occupied senior positions in UCO Bank, United Bank of India,State Bank of Patiala, State Bank of Travancore & State Bank of India where he headed the Central European Credit Desk at Frankfurt,Germany from 2006 to 2011 covering 15 countries of Central Europe. Has undergone International Banking Training from Asian Institute of Management, Manila, Philippines in the Year 2003 and a Multi-currency lending-technique training at the Euro Money Institute, London in 2009.
He has specialisation in Credit, Foreign Exchange,Vigilance, Monitoring & appraisal of Corporate Loans, MSME Credit,Gold Loans, Agricultural Loans & NRI Business Management in assets & liabilities. As a Forensic Auditor, he has conducted various Transaction Audits allotted by Banks.
He was felicitated by the Central Vigilance Commissioner , Sh. C.V Chowdhry for winning first prize for best article on Preventive Vigilance in 2015. He is also an accomplished Public Speaker having conducted multiple Motivational Seminars for institutions like ONGC, National Housing Bank & Bank of Baroda. He is an Independent Director & consultant to various big entities in the corporate sector at present.
