Environmental, Social and Corporate Governance Standards – ESG – are increasingly becoming part of the lexicon of most companies and investors. The bank, in addition to being no exception, has a prominent role as a source of ESG financing. This is at the same time that you have to implement these best practice policies internally as required by the regulators. According to Pedro Pereira, managing director and partner at Boston Consulting Group (BCG) Portugal, national banking is on track in the transition to ESG. But he cautioned, in a written interview with Dinheiro Vivo, that the change must be a “coordinated effort and not just catalyzed by banks”.
What impact can the adoption of ESG standards have on banking services?
The banking sector, as a driver of the economy, will play a central role in the speed and depth of change of ESG. The adoption of ESG standards is promoted by all economic agents in the ecosystem: consumers, businesses, investors and government agencies. As such, banks will have to adapt their entire value proposition to better serve the new requirements of economic agents.
as such ?
In retail, develop an ESG offering that serves consumers; In businesses, support the ESG transition through lending and risk assessment that includes ESG factors; in asset management, integrating environmental, social and corporate governance factors into the financial advice provided to investors. Finally, regulation, particularly at the European level, required banks to incorporate ESG standards into risk, asset management and governance. A recent analysis by BCG indicates that there is an ESG valuation premium of around 3% in banks. The winning banks will be those that are able to integrate ESG into their business model and use it as a competitive advantage, more complete risk assessment, faster decision making and products that fit customer preferences, among other things.
How have national banks done in adopting ESG standards?
Portuguese banks have been effective in responding to the compliance standards required by the regulator, and have also taken the first steps in developing products and services appropriate to ESG’s requirements for consumers and investors. In this sense, Portuguese banks operate mainly on three fronts: integrating ESG criteria into the decision-making process for granting credit or creating credit lines dedicated solely to financing the ESG transition; In investing in retail products that promote better ESG practices, namely subsidies on home loans based on energy certificates or checking accounts with a contribution to an associated NGO. […] From a geographical point of view, Europe as a whole is a leader in many of these matters, with a particular focus on Central Europe and the United Kingdom.
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Among the criteria involved – environmental, social and governance – which are the most difficult to meet and why?
As the name suggests, ESGs have three axes: Environmental, Social and Governance, and implementation has been and will be challenging in all three areas. For example, from the point of view of environmental sustainability, the goal is clear, with targets for carbon emissions and global temperature control. Although the goal as a whole is tangible, implementation is not linear: how to ensure the correct measurement of carbon emissions by companies is one of the many challenges banks face. Associated with the correct measurement of indicators, issues of risk assessment and subsequent pricing by banks arise. At the same time, it will be necessary for both companies and individuals to also be effective agents of change, and that it be a concerted effort and not just catalyzed by the banks.
According to a Boston Consulting Group study, many asset managers continue to deal with ESG issues in a highly fragmented manner, which makes it difficult for companies to gain the depth of experience needed to differentiate their offering and deliver real value. How do I overcome this problem?
ESG incorporation by asset managers cannot be considered as a product line or a partial investment strategy. The winners in this change will be those who truly incorporate ESG’s decision criteria into their investment process. Otherwise, they risk losing their asset management mandates by overestimating the effects of ESG, known as greenwashing. In a recent BCG study, a third of US asset managers said they had lost or were at risk of losing more than 20% of their institutional power due to inadequate ESG capabilities.
The source of ESG funding is based on quality funding from banks. Is there a way to overcome this dependence or to provide the Bank with the necessary resources to facilitate the proper application of these policies?
Bank financing will play a pivotal role in the ESG transition process. Currently, there are already alternative forms of financing such as government and European subsidies or green bonds [obrigações verdes]. The value of green bonds issued in Portugal increased, with Portuguese banks actively participating in their underwriting. Due to its size, green bonds are a phenomenon reserved for large Portuguese companies, and therefore, the reliance on bank financing is greater among individuals and SMEs. In order to facilitate good application of ESG policies by banks, it will be necessary to ensure the quality of information and data to allow for their monitoring. In parallel, it will be necessary for both companies and individuals to be effective agents of change.
Gender diversity is one of the criteria for environmental, social and corporate governance, specifically in the area of governance. How does the banking sector behave in this area? Is the path taken by Portuguese banks in this particular field far from their European counterparts, for example?
Portuguese banks have made a lot of progress in this area. Evidence of this is the incorporation of gender equality goals into their strategic plans, as well as transparency in the progress of results. Most Portuguese banks are moving towards gender parity in the workforce, however, the representation of women in leadership positions is well below 50%. On bank boards, the situation is getting worse with only 19% of women on boards according to a 2019 DBRS study, well below the European average of 32%.
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