ESG and its importance for the financial sector
ESG from a banker’s view
ESG: A new topic has come up in the last few years, seemingly in the same timeframe as digitalization, Corporate Governance, blockchain, sustainability, etc.
It is “ESG”, the abbreviation for “Environmental, Social and Corporate Governance”.
These three factors are a measurement in nowadays world to define how “good” a company or an investment is in the fields of sustainability and social behavior.
Impact for the financial industry as a whole
The impact on the financial industry is quite important as together with other stakeholders also investors are watching banks and their behavior. There is a strong demand for ESG-conform investments. The market for sustainable investments is growing and ongoing developments in the world let people focus more and more on these aspects of their investments. Apart from banks, I believe that especially pension fund schemes are impacted by ESG as more and more people and institutional investors are looking out for or even requiring ESG-conform investments. The pressure definitely will grow.
Impact for me as a banker
So, as a banker, I feel impacted by ESG like from two sides:
- Do I have something to offer to my clients? Do I have proper ESG-investments in my portfolio or within reach, e.g. with my business partners to offer to my clients?
- How is my bank behaving? Am I in a position to sell ESG-products?
I think there is a strong relationship between these two perspectives when looking at ESG. How can I offer ESG investments to my clients if my bank is not behaving in a “right” way? This would simply not be credible and trustworthy. However, there is, in my opinion, a certain tolerance zone, meaning you don’t have to be the benchmark in order to offer ESG investments. However, you can’t just stand on the opposite side. A certain amount of implementation I should show within my bank or my clients just won’t buy.
Speaking of clients leads me to the segmentation of clients and their wishes. While smaller clients often just might want to feel comfortable with their investing there are the larger, institutional clients that might be more demanding. They can set up more pressure on banks or pension fund schemes.
ESG and Yield
As of today there still seems to be much more interest in getting good yields than investing sustainably. Many funds or pension schemes still hold big oil assets in their portfolios just because of the generous dividends they pay. However, thinking more in the long run, there is the danger that these now fat-dividend paying assets one day might become stranded assets. The same, by the way, goes for car company shares if the companies are not able to cope with the changes in their environment. This means they have to ensure they make the transition from fuel-driven cars to electric cars.
What seems to be clear or proven by many studies is that sustainable investments, meaning ESG investments as well, show lower volatility and therefore higher stability in their values.
Measurement of ESG conformity
As of today, there do not exist any global standards to measure independently the ESG conformity or the level of sustainability that has been reached by the investment (or organization itself).
This is a clear deficit and problem to be solved as comparability (and in some way credibility) is not given with ESG investments. As GIPS (Global Investment Performance Standards) show, it is generally speaking, very well possible to come to global standards in the investment area.
Within ESG investments, a large spectrum of possible impacts can be found, reaching from exclusions of certain specific securities on the basis of single stocks, going further to exclusions of whole sectors, further to sophisticated rules for investing and even leading to deep value investing with a focus on ESG. The words to know here are negative screening, impact investing, best of class and some more.
How to cope with ESG development
There is one group of people who believe that all the topics of ESG will come into our world whether we want it or not, so there is no sense in trying to avoid them. Examples are the development of electric cars, the avoidance of heavy fossil fuels like coal or oil, regulatory and governmental pressure on these topics, etc. It is not always easy to say if some of these developments are marketing-driven or due to some other circumstances; think for example of the many new cruise ships that now run on “clean” LNG.
On the other hand, there seems also to be a development to the direction that ESG-relevant behavior and “things” become cheaper, sometimes even cheaper than non-ESG. There are examples of energy produced by solar cells in Arabic countries that are cheaper than oil/fossil fuel produced energy.
From a banker’s perspective, you have also to be aware of the wealth that goes by inheritances to generally more climate-conscious younger generations. As a banker, this is something extremely important I should keep in mind when talking to new clients.
Not only avoidance but also taking opportunities
I think there should not only be a retro-thinking of “How can we avoid this and that” but also using new or already existing opportunities. However dumb it might sound: It could also be a good idea to plant more trees that absorb Carbon Dioxide (CO2) instead of only reducing its production. And as every economist has sometimes hopefully learned, it is also a good idea to reduce it there, where it costs less. Even if this sometimes has the appearance of unethical behavior.
Considering “ESG Pressure”
As for coming back to investments, there is a certain slight ESG pressure existing and some more on the horizon.
Example: The European Commission proposed measures to be taken within benchmarking, classification and disclosure of ESG within investments. Investors have to be asked about their preferences with regard to sustainability.
The areas of conflict within ESG require a fair balance
Environmental – Social – Governance is within itself sometimes an area of conflict. Think of the single low-paid mother of three children driving a diesel car as her only big asset. Do you really want to take it away from her because of the negative environmental impact? Here you come into conflict with the social aspect of ESG. I am sure you can imagine yourself many other situations where these conflicts might arise.
So, ESG is always a question of fair balance, too.
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