ESG Norms : Catalysts of Growth for Banks
ESG stands for Environmental, Social and Governance. Collectively, these cover a broad range of non-financial issues increasingly regarded as sources of financial risk and opportunity. The words are now magic words cultivated frequently by valuers of businesses. The higher the ESG compliance by a bank or corporate, the higher its value.
The original use of the term ESG dates back to 2004 when the then-United Nations Secretary-General Kofi Annan invited 55 CEOs of major financial institutions to participate in an international project to integrate ESG into capital markets. That group produced a study in 2005 entitled ‘Who Cares Wins’, which set out the business case for embedding ESG factors into investment decisions, thereby improving the sustainability of markets and leading to better outcomes for society.
ESG norms convey that Corporate Governance must proactively ingrain a protection policy for fauna and flora in business planning. The observance of social responsibilities of mutual co-existence coupled with the statesmanship role played through Corporate governance alone shapes the world into a happy place to live. ESG initiatives protect the atmosphere for future generations.
Carbon dioxide (CO2) makes up for a vast majority of greenhouse gas emissions, along with smaller amounts of methane (CH4) and nitrous oxide (N2O). These gases are released during the combustion of fossil fuels, such as coal, oil, and natural gas, to produce electricity.ESG norms target climate risks to achieve the goal of preventing global temperatures from exceeding 1.5 degrees. Temperature control is possible only if the CO2 level is reduced by 12% yearly from 2022 to 2050 to sustain the climate. A correctly implemented ESG framework alone can protect the world from adverse impacts on all species’ lives, livelihoods, health and well-being.
ESG-related opportunities and risks are genuinely relevant for Banks. A harmonious ESG ambience ensures a safe environment for the continuity of sustainable global operations. A mutually helpful equation between nature and natives generates prosperity. The control facilitates exuberant economic performance boosting GDP to great heights. Banks thrive as catalysts of innovations and advancement. The living standards rise when climatic risks are under control.
In good times, the banks play a pivotal role in rotating cash around manufacturing, trading and services. The faster the rotation cycle, the faster the growth. The multiplication of wealth leads to new jobs and employment. Banking thrives best in environmental and social equipoise supported with ethical governance practices. A lousy environment creates terrible banks.
Non-compliance with ESG norms affects banks in four ways:
1. The e-garbage of non-biodegradable floppies, CDs, tapes, computers, printers, monitors, glow signs, token display systems, and air conditioners inside banks is creating havoc with the local ecology and choking the livable space. RBI should enjoin banks to desist this menace as statutory compliance. Banks must divert profits to sponsor e-garbage de-materialising units at the district level for all branches to destroy e-waste.
2. Polluting units expose the bank borrowers to physical risks of climate change like severe weather, floods, fire and hurricanes, damaging the borrower’s assets and impacting their cash flow generation and debt servicing capacity, making accounts NPAs.
3. Banks themselves encourage the degradation of the environment by providing huge finances to the carbon-intensive oil companies, which disrupt environmental harmony. As the oil business is highly profitable, commerce defeats ecology.
4. Banks are also investing big in the EV segment, which thrives on carbon-intensive lithium batteries which can not vanish for eternity.
ESG initiatives are also a great business opportunity for banks:
• India needs $ 17.77 trillion to transition to net Zero carbon status by 2070. A large amount is required to install global climate protection apparatus that banks can finance.
• Structural changes are incorporated into the traditional lending and investment approach to support green financing, opening a new proactive lending that would sustain both banks and clients.
• The Indian government’s resolve to create 500 GW of non-fossil fuel power generation capacity will require a robust mechanism of funding the solar, wind and bagasse energy sources.Funding of EV-based projects for battery and power storage industries will absorb huge bank funds.
• ESG requirements are becoming a fundamental need for human lives, and the size of finances needed to create green capabilities would require the pooling of finances by various banks.
• Indian Banks have to take up the challenges in an organised way as a national obligation. Banks boards and senior management should regularly undertake a comprehensive assessment of climate risks. The credit rating rationale for each borrower should carry weightage for ESG compliances. Banks should maintain adequate capital for climate-related risks.
• Banks should evaluate how climate-related risks impact different business areas under the Credit Risk profiles, Market positions, Liquidity and Operational risks to curtail stress in the longer term.
The Sooner the banks realise the impact of climate changes on the loan portfolios; the stronger would be the adoption of ESG norms by borrowers. The loan lifecycle will grow longer, making borrowers come laughing all the to the bank.
– Hargovind Sachdev
