Why the Finance Sector 'Cannot Afford' to Dodge ESG
With regulation often comes complication.
Government directives on the local, national and global stages are more common than ever as the sustainability movement kicks into gear, though it is often difficult to ensure each and every party is on board and pulling their weight.
The New Collective Quantified Goal (NCQG) - which was introduced at COP29 in November 2024 - is one such regulation.
The NCQG was established with the aim of assisting developing countries in their climate change mitigation and adaptation efforts through financial support and skill sharing.
However, luminaries like Steve Round, Co-Founder and President of SaaScada and Chair of the Governing Board Forum for the Global Alliance for Banking on Values, calls attention to a significant discrepancy.
As wealthy nations focus on aiding the developing world, it is becoming increasingly apparent that their domestic financial institutions are often eluding their ESG obligations.
The current state of ESG in the finance sector
Banking leaders have vocally expressed concerns about over-reliance on the private sector to meet net-zero commitments. However, waiting for governmental directives is not a luxury the finance sector can afford.
It's crucial for financial institutions worldwide to exhibit courage and integrate ESG deeply within their organisational culture.
This integration involves accepting minor profit reductions to foster greener operational frameworks and incentivise customers towards sustainable practices.
Otherwise, without a sweeping transformation, achieving crucial climate and energy targets remains a distant dream and any environmental pledges made by these institutions could be dismissed as mere platitudes.
"The finance industry cannot afford to wait for government directives. Financial institutions across the globe must start showing some bravery in their approach to sustainability"
The barriers to net zero
A paper by the Institute of International Finance (IIF) captured the finance industry's reluctance toward a finance-centric decarbonisation strategy.
The paper highlights the complexity of transitioning to net-zero, especially amidst a 'polycrisis' of economic challenges, arguing that:
- "Transitioning to net zero is complex and difficult, especially when the industry is facing a 'polycrisis' of interlinked economic stressors,"
- “Capital will only move in support of net zero goals at scale when the economics make sense,”
- "Regulating the finance sector 'won't shift the economic fundamentals needed for real economy transition'."
Although there is some truth to these points, such a stance could damage the industry's reputation. If leadership within IIF is confined to making excuses and critiquing regulatory frameworks, perhaps a change in leadership is overdue.
The challenges, albeit vast, should not deter efforts but should instead galvanise action towards sustainable solutions.
"To successfully put green products at the centre of banking, the industry needs to agitate, innovate, incubate and mainstream"
How to drive meaningful change within the finance sector
Decarbonisation remains largely a finance-centric issue because the power for change lies substantially within this sphere.
For instance, innovatively incorporating sustainability into core banking operations and lending processes could promote environmentally and socially conscious financial decisions.
This might include decisions like opting for loans for eco-friendly properties rather than new, potentially ecologically disruptive constructions.
Consider the influence of banks engaging only 10% of their vast customer bases with attractive sustainable product offerings, perhaps offering lower interest rates for environmentally friendly choices.
The ripple effects could be monumental, potentially swaying millions towards making greener choices, simultaneously establishing these banks as pioneers in green banking.
Ecology Building Society serves as a prime example. It anchors its operations in sustainability, channelling savings into sustainable projects like eco-homes and community schemes while offering mortgages that bolster positive environmental or societal impacts.
In 2023 alone, it financed sustainable ventures worth US$81m, underscoring how profitability and sustainability can coexist successfully in the financial sector.
The call is out for major financial institutions to recognize the economic viability and broader societal benefits of sustainable banking, thereby catalysing substantial environmental and social changes on a global scale.
The transformation necessitates not only innovative thinking but a strategic overhaul that integrates real-time data on environmental impacts into banking processes, empowering all stakeholders to make informed choices that benefit the planet.
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