Bank CEOs lead charge on sustainable finance and ESG impact

Banks have been involved in corporate social responsibility for many years. On the other hand, the interest in environmental, social and governance (ESG) initiatives and sustainable finance only made an entry in most bankers’ lexicon less than a decade back.

In that short time frame however, ESG has moved from being niche to mainstream. The historic Paris Agreement signed during COP 21 in 2015 brought climate change to the forefront for the banking sector with its reference to “making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development”. COVID-19 drew attention to the social aspect of ESG. With rapidly growing interest, ESG and sustainability are now front and centre for all banks.

Bank C-suite set the tone

The ESG framework that started as a risk management exercise for most banks, soon spun out a plethora of business opportunities linked to the global transition to low-carbon economies. This meant that banks would need to reorient their business strategy and mindset to successfully embed sustainability into every part of the organisation. Today, ESG has become a strategic priority driven by the banks’ boards and CEOs, and now involves every bank employee.

Nearly all banks now have sustainability and ESG as a core part of their strategy, with some banks also explicitly stating this in mission statements. Given the scale of change needed to make the sustainability journey a success, it is critical for banks that the right tone is set at the top by the CEO.

Tay Ah Lek, CEO of Malaysia’s Public Bank said: “Sustainability and climate change are the greatest battles of this generation. Bankers today have to be good at running a bank for the greater good and to be able to do so in the face of intense competition, rapid technological changes, digital fraud, and hyper fluid business dynamics.”

Similarly, Brian Moynihan, CEO, Bank of America, is not only leading the sustainability effort for the bank globally but is also the chairman of the Sustainable Markets Initiative (SMI) which is a CEO-led global forum across industries. Moynihan stated: “The Sustainable Markets Initiative is working with companies of all sizes and industries to help bring clean technologies to market, deploy capital to scale innovation, and address transparency. We accelerated progress through cross-Task Force collaboration, helping SMI CEOs develop solutions and scale not achievable by one industry alone.”

Driving sustainability in Asia

While global CEOs are taking the lead, different markets in Asia Pacific are at varying stages of maturity and it becomes incumbent on the CEOs in the region to drive leadership in sustainability and seize local business opportunities.

Mary Huen, CEO for Hong Kong, Greater China and North Asia at Standard Chartered, said: “As an international financial centre and a super-connector, we believe Hong Kong can play a key role in bridging financing gaps, connecting issuers and investors, and driving innovation in sustainable finance across Asia. According to our report jointly with World Resources Institute, the Guangdong-Hong Kong-Macau Greater Bay Area will need an additional investment of $1.84 trillion to achieve carbon neutrality by 2060. This presents huge opportunities for Hong Kong’s sustainable finance market.”

Mary Huen, CEO for Hong Kong, Greater China and North Asia at Standard Chartered

Standard Chartered in Hong Kong has positioned itself well for the opportunity by offering an extensive suite of innovative, sustainable finance products including green mortgages, sustainable savings accounts, green bonds, ESG funds and other related structured products. Just this month, the bank launched a new ESGlinked cash account for corporate banking clients in Hong Kong that rewards them for meeting material ESG-related targets, and links the credit balance interest rate and fee pricing with the client’s performance. In May this year, the bank collaborated with Mox, Mastercard and Libeara to complete a proof-of-concept on a tokenised deposit and a tokenised version of carbon credit through the Hong Kong Monetary Authority’s supervisory sandbox.

A slightly different path awaits banks in the sustainability journey in India, given its status as a developing nation and one that has committed to net zero by 2070. Banks in India well understand the importance of ESG, however, and are working hard to embed this in their risk as well as business frameworks.

Sashidhar Jagdishan, managing director and CEO of HDFC Bank, said: “The significance of ESG parameters can hardly be understated. While globally ESG frameworks are still evolving, our ESG disclosures are increasingly going through a similar rigour as financial parameters—especially with the mandating of assurance on certain ESG attributes.”

Amitabh Chaudhry, MD and CEO of Axis Bank said: “ESG, and sustainable banking within it, are now an integral part of our mission statement. To set the tone at the top and tie the diverse ESG mandates together in one thread, we established the ESG Committee of the Board in 2021. Having such a committee has helped us bring the diverse aspects of ESG under a common strategic umbrella, and strengthens our ability to move from being reactive to proactively supporting India’s low-carbon, equitable, and inclusive economic transition.”

Amitabh Chaudhry, MD and CEO of Axis Bank

Axis Bank has already issued a green bond as well as a sustainable Additional Tier 1 perpetual bond, and has also made significant strides in strengthening its climate risk management capabilities. The bank has signed blended finance deals that help to build an alternative financing model for climate action in India. On the retail side, the bank has products aligned to green sectors, such as electric-vehicle financing, green home loans, and rooftop solar financing for small businesses.

Opportunities and challenges for banks

The transition to a low-carbon economy requires huge capital investments. A McKinsey study reports that funding needs for a net-zero transition could exceed $4.4 trillion annually through 2030, and financial institutions have an annual direct financing opportunity of about $820 billion.

Banks can look towards assisting clients on investment solutions ranging from basic ESG deposits to impact investments. Mergers and acquisitions are another window as some corporates restructure and dispose certain assets or acquire new low-carbon businesses.

There are also avenues for banks to provide a wide range of advisory services ranging from the establishment of sustainable finance frameworks, raising financing for the transition or incorporating ESG-linked performance indicators into financing.

Most banks have linked senior management remuneration to their performance on sustainability, and publicly declared targets for sustainable assets, and the revenue they plan to generate through sustainable finance.

While going down the sustainability road is the right route to take, it can be extremely tricky and ridden with challenges.

Firstly, there is a lack of guidance on what constitutes sustainable finance in most jurisdictions and even where guidance is available, it is restricted to a few industries and is not easy to compare across jurisdictions.

Secondly, there is a lack of deep understanding in the banking industry with respect to the intricacies of ESG especially with respect to emerging technologies, although banks have now been investing in staff training on this front.

Lastly, sustainability requires cooperation across businesses and infrastructure functions, and this does not come naturally, especially as this is a topic not many bank employees are familiar with yet.

Implementing the CEO vision

The CEO’s role becomes even more critical when it comes to translating this vision into practice. There are multiple areas that need to be addressed, starting from identifying the most material risks and opportunities with respect to sustainability for the bank, getting the right structure for the sustainability organisation, identifying the product framework to follow and ensuring that all the teams in the bank are properly trained.

Most leading ESG banks have set up group-wide sustainability committees led by the CEOs, and often supported by a chief sustainability officer to help drive the strategic transformation, including helping frame the sustainable finance framework for the bank and in validating transactions for compliance to the same.

Bank CEOs also need to put their strategic caps on and identify where investments are to flow, for example, IT systems in order to access the right data and fulfil emerging requirements on portfolio emission modelling, ESG reporting and climate stress tests.

They are also actively involved in ESG client discussions especially around transition financing with corporate clients.

The road ahead

The path towards sustainability is a long one with banks having net zero targets for their financed portfolios until 2050.

Most critical in the short-term would be the banks’ ability to meet the interim targets in the high-emission sectors. There needs to be a close ongoing strategic dialogue between the banks and corporates in these industries, especially at the CEO level to tackle potential speedbumps upfront.

The ESG space will continue to evolve, and new obligations will continue to be added, for example, biodiversity. As ESG volumes grow and banks tread into new areas, the risk of greenwashing will increase. There will be the added complexity, in certain jurisdictions, of a widening divide on ESG across the political spectrum, and banks would increasingly need to walk a tightrope as they try to balance the sustainability needs of its various stakeholders.

While there might be numerous challenges, there are also a lot of positive developments happening in parallel. Different jurisdictions are working together to align their taxonomies for the development of the Common Ground Taxonomy, meaning there will be a convergence in green standards in the future. There are also green fintechs helping financial institutions to access reliable data, and forecasting and compliance tools to facilitate their journey in sustainable finance and climate risk management.

Huen from Standard Chartered said: “When you think about the progress banks have made on their sustainable finance journey in just the last five years, there has been huge amount of momentum. Longer-term, we expect sustainable finance to be part of mainstream finance, and be fully integrated as part of BAU [business as usual] across the banking industry, with sustainability objectives explicitly linked to performance metrics. We also expect fintech innovation to play a bigger role in shaping the development of sustainable finance.”

Adds Chaudhry from Axis Bank: “Achieving net zero in India will require a concerted effort to bring together policy, regulations as well as incentives. The banking sector will continue to play a consultative and collaborative role in engaging with the policymakers to nudge the policy reform forward in this direction and contribute to policy and governance reforms. This will require banks to adopt an integrated, top-down approach in policy formation, implementation, and enforcement, and bottom-up approach in stakeholder awareness, policy advocacy, collaboration and discussion.”

However, given the absence of clear interoperable taxonomies, risk of greenwashing, lack of adequate knowledge and active stakeholder collaboration on the topic, the responsibility for the industry’s success in sustainable finance falls to CEOs who fully embrace it and rally entire organisations alongside them.