Governments around the world are rapidly evolving laws and regulations to integrate an ESG (Environmental, Social and Governance) framework that will impact the License to Operate for many organizations and sectors.
If we were to take a step back and look at some of the major ESG issues that have impacted the global marketplace, the COVID-19 crisis and the way many businesses have handled the situation in relation to their stakeholders (internal and external) is right on top of the list. In the last 18-24 months, we have also seen issues pertaining to – climate change/ action; water/ air/ soil pollution; the ‘MeToo’ movement; the ‘Black Lives Matter’ movement; organizational racism; third party and supply chain risks; Corruption/ Money laundering and Fraud; Food security; education and unemployment, have all held their fair share of the headlines in global media and social media platforms, while also becoming critical matters for discussion within boardrooms to identify solutions.
As of last week, all eyes have been on the ‘Eye of Fire’ in the Gulf of Mexico ignited by a leak in an underwater gas pipeline which caused an inferno like fire to burn on the surface of the sea for about five hours last Friday.
Early 2020, as most of the world was going into some of lockdown due to the spread of the COVID-19 virus, we witnessed several major heavy industries come to a halt. Soon after, social media platforms were overwhelmed by the emergence of videos and pictures showing the environment recover from years of climate change related impact – the water quality of the river Ganges in India becoming drinkable; beaches around the world seeing a resurgence of turtle nests; endangered otters returning to the lakes in Malaysia; recovery in the global fisheries; over 2,000 dolphins emerging off the coast of Fujairah; and many more similar inspiring occurrences. As we realized that environment and social issues have a deep and direct influence on economic stability, it only reinforced the need for a more stringent ESG risk and strategy framework across the global marketplace.
The UN Sustainable Development Goals (SDGs)
In September 2015, 193 member States of the United Nations met in New York to adopt 17 new Sustainable Development Goals (‘SDGs’) to make our world more prosperous, inclusive, sustainable and resilient. The SDGs are a strategic plan of action for People, Planet and Prosperity. They are universal, applying to all nations and people, seeking to tackle inequality and leave nobody behind. They are wide ranging including ending poverty and hunger, ensuring sustainable consumption and production, and promoting peaceful and inclusive societies. The agreement on a new sustainable development agenda expresses a consensus by all Governments including the Kingdom of Bahrain, that the SDGs can only be achieved with involvement of the private sector working alongside Governments, Parliaments, the UN system and other international institutions, local authorities, civil society, the scientific and academic community – and all people.
Each and every SDG provides an opportunity for business and two are worth highlighting as cross-cutting themes:
— SDG 12 focuses on production and consumption and includes a specific target on “adopting sustainable business practices and reporting”; and
— SDG 17 includes two targets on multi-stakeholder partnerships to ensure this attracts sufficient focus.
The UN SDGs also positively influence a robust ESG framework and the associated practices of stakeholders within the public and private sectors by creating opportunities for shared value, and guide them in defining strategic priorities, setting goals, assessing impacts and reporting.
The Financial Services sector can save the Planet
Banks are going further, faster on the ESG journey - Changing customer and investor expectations reflect a new way to think about ESG and how it can create value for banks. COVID-19 has highlighted the critical role banks play in supporting the resilience of communities. It has brought issues of financial security, access to financial services, and inclusion to the forefront placing banks at the crossroads of economic and social issues as never before.
At the same time, concerns regarding climate change are also accelerating amid predictions it will have a more significant and longer-term economic impact than the pandemic. Banks have a critical role in financing the transition to the low carbon economy, as well as the need to identify and manage climate risks related to business activities.
The world is a different place as a result of COVID-19, which has also accelerated the shift to stakeholder capitalism. Banks must decide how they wish to respond to this new reality and seize the unique chance to influence a new normal in business and finance.
We have witnessed the tremendous agility and commitment that the Banks and the sector under the leadership of the Central Bank of Bahrain have shown in response to the pandemic, this combined with stakeholders’ perspectives on ESG can contribute to a bank’s resilience in the long-term.
Understanding stakeholder expectations
The first step is to understand where your business stands today through the eyes of your key stakeholders. In our experience, stakeholder expectations are high and increasingly relate to how the financial institution is contributing to solutions facing society and the economy – entrepreneurship, unemployment, climate action, community development, and empowerment through the nationalization of the workforce embedding inclusion and diversity within the organization’s DNA.
The past few months have put a particular spotlight on culture, human capital management, and the robustness of supply chains. In addition to scrutinizing how the organization operates, customers and clients are looking at how it models leadership by offering banking and investment products that align with their values and contribute to societal and environmental solutions.
Institutional investors and regulators also have increasing expectations regarding conduct and disclosures that fall into the spectrum of ESG – the environmental, social, and governance factors that present material risks and opportunities for the business.
An enterprise-wide vision of ESG
These changing expectations reflect a new way to think about ESG and how it can create value for banks. Fully integrating ESG as part of the way you do business, not just manage risk, can create new business opportunities, and serve to attract and retain customers. Embedding ESG as a part of all business decisions based on a deep understanding of stakeholder expectations, and how an ESG lens on core business activities can contribute to broader strategic objectives can enable significant differentiation from competitors.
Many banks have already taken an initial step along this path by aligning their community investments and corporate responsibility activities in line with their values and purpose that includes aspirations beyond traditional business goals. It is important to have an enterprise-wide vision and ambition regarding ESG that the organization can work towards. CEOs need to ask themselves:
— How can we leverage ESG to strengthen our business?
— What influence do we want to have?
— How can we be truly bold and create something that both differentiates us and really reflects our values as an organization?
Maximizing the opportunity
These are unprecedented times that we live in. For all the challenges, this also means that there is an opportunity to have a greater impact than ever. In the light of this, three thoughts that every business leader must consider:
— Now is not the time to be incremental – COVID-19 has hugely accelerated and amplified the issues that ESG concerns itself with. Be bold in what you do.
— Be authentic – everything that you do must be rooted in the bank’s values and reflect the way that the bank wants to do business. Don’t commit to things you don’t believe in. Stakeholders expect accountability.
— It’s a journey – you won’t get to where you want to be overnight. It takes time and perseverance. This makes it even more important to engage your stakeholders as part of the journey.
ESG issues as well as their associated opportunities and risks are becoming more and more relevant for financial institutions. For banks, sustainability is not just an ethical, but may soon enough also become an economic and existential question — generating a new type of risk: ESG risk. Banks ought to approach ESG risks in a holistic fashion when embedding them into their risk management frameworks. This process includes adjusting business and risk strategies and corresponding risk appetite statements, making sure roles and responsibilities are fully transparent throughout all three lines of defense.
While ESG risk is not a fully stand-alone risk type, it exerts influence on financial and non-financial risks present in a bank to varying degrees. Hence, risk management methods and processes must be amended, considering the complex cause-effect-relationships across risk types. This involves risk measurement/ assessment techniques in ‘run-the-bank’ and in ‘change-the-bank’ processes as well as in stress testing applications.
Besides embedding ESG into risk frameworks, banks need to consider related issues in product design, pricing, and sales decisions. Also, an appropriate consideration of ESG risks in a wide range of change processes is of vital importance for fostering profitability.
Business leaders in Bahrain have an immediate opportunity to make a difference within the marketplace and the community by embarking on their ESG journey and embedding select UN SDGs within the core DNA of their business. Invest in ESG now and you’re investing towards building a better and financially sustainable business for the future of our planet, and for the young generation of leaders and professionals to come.