As the 2020 global COVID-19 pandemic developed, many predicted progress on key Environmental, Social and Governance (ESG) issues would take a back seat. World leaders had no choice but to focus on crisis management and economic support.
The reality has been quite different.
Stakeholders, including policymakers, regulators, investors, shareholders, consumers and communities have embraced a greater ESG responsibility. They’re demanding more action from Australian financial institutions, not less. The pandemic has highlighted the role financial institutions play in supporting the resilience of communities and the larger economy. Climate change risk has gone from a fringe topic to a material financial risk class.1
Globally, governments and financial regulators are driving momentum across financial services to improve identification, management and disclosure of climate change risk. Regulators are moving to mandate findings from the Task Force on Climate-Related Financial Disclosures (TCFD). Regulations are already in place in the EU, planned for New Zealand in 2023 and Hong Kong no later than 2025. We can expect Australia to follow suit in the near future.
Crucially, COP26 has heightened focus on the need for interim targets to show progress towards net zero in 2050. This poses a fresh set of risks and opportunities. Financial institutions will need to shift focus – from elevating commitments to ensuring stakeholders understand the credible plan and economic implications of achieving those commitments.
It will be a delicate path to tread.
Key strategic questions for Australian banks
1.
What role do we play in accelerating investment flowing into sustainable infrastructure?
2.
What is the credible path to achieve net-zero carbon emissions across our portfolio?
3.
How do we best support customers through this transition with new products and services?
4.
What targets and measures do we need for the short, medium and longer term to guide us and our clients?
5.
What new capabilities do we need to ensure success?
ESG adoption: Challenges and opportunities
Last year, KPMG predicted regulators and oversight committees would become more vocal about adoption of ESG. Since then, ASIC and the ASX have issued guidelines on addressing these risks in corporate disclosures. More recently, the Prudential Practice Guide (CPG229) and ongoing Climate Vulnerability Assessments (CVA) have reinforced the financial industry’s commitment to change. But it’s not just the regulators. CEOs now rank climate change as one of the top three risks to achieving their growth ambitions.2
But with challenge comes opportunity.
Prior to the pandemic, the cost of climate inaction on Australia’s annual GDP was valued at $130 billion.3 Now, according to recent BlackRock research, this is a global investment opportunity worth $50 trillion – with cumulative GDP growth as much as 25 percent higher over the next two decades.4
As the transition accelerates, companies with a well-articulated long-term strategy, and a clear plan to address the transition to net zero, will distinguish themselves with their stakeholders by inspiring confidence that they can navigate this global transformation.
Larry Fink
BlackRock
Chairman and CEO
Transition and transform: Embed ESG into your business strategy
Globally, we have seen bank leaders focus on embedding ESG into their business strategy – transforming from top-down and bottom-up. While it’s true individual portfolio mixes drive individual bank challenges, we’ve observed successful banks have focused on five key building blocks:
1. Adding innovative products for all customers
Leaders are continuing expansion into carbon-credit markets, sustainability linked loans, sustainable exchange-traded funds (ETFs) and carbon-footprint measurement tools for retail customers. These product innovations will be a key differentiator to attract new capital inflows.
2. Improving risk management and analytics
Uplifting existing sustainability risk management frameworks to improve identification and management of specific risks. Modelling the impacts of physical, transition and litigation risks across portfolios, while social risk such as modern slavery and human rights, will drive far greater transparency in supply chains.
3. Educating staff throughout the business
Successful banks are engaging global thought leaders to educate everyone from the Boards and Senior Management to front-line staff. Everyone is then aware how climate change risks impact every part of their business-as-usual decision-making.
4. Clarifying data strategy and architecture
ESG data has traditionally been lagging, inconsistent, self-reported and patchy at best. Currently, 82 percent of global institutional investors believe most companies do not have the data available to disclose against sustainable reporting frameworks.5 Just knowing where to start has been a significant challenge for many banks.
5. Forming strategic partnerships
Leading organisations are broadening their ecosystems via strategic partnerships. From upskilling senior management and front-line teams, to introducing new products and acquiring crucial new digital and data capabilities.
Examples of global and local ESG innovators
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Call to action: Developing an integrated ESG strategy
Arguably the single greatest challenge of our time, climate risk is now attracting immense visibility from regulators, the investor community and customers alike. Pressure is growing on local participants to make genuine net zero commitments and articulate their transition strategies.
Financial institutions need to rapidly accelerate the development of an integrated ESG strategy by:
- Clarifying the role and position they want to play within their sector (be it leader, fast-follower or 'in the pack').
- Embedding ESG strategy into the core business and building ESG organisational muscle; leading with tone from the top but transforming from the ground up to ensure an effective balance between the complexities and interrelated nature of the 'E' the 'S' and the 'G'.
- Driving a clear understanding of the priorities and capabilities needed by the organisation as transition pathways are better defined.
- Developing talent, strategic partnerships and alliances to help accelerate the journey to net zero.
Sources
- AR6 Climate Change 2021: The Physical Science Basis – Sixth Assessment Report, IPCC, August 2021.
- KPMG 2021 CEO Outlook, KPMG International, September 2021.
- $130 billion per year benefit to GDP by avoiding climate change, The Australia Institute, 24 April 2019.
- Larry Fink's 2021 letter to CEOs, Blackrock
- Institutional Investor Trust Report (PDF 3.2MB), Edelman, 2020.
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