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Going beyond ESG in banking

Author: ICAEW Insights

Published: 13 Dec 2022

An organisation of independent values-based banks has been recognised at this year’s Finance for the Future Awards for using finance to deliver sustainable economic, social and environmental development.

Founded back in 2009, the Global Alliance for Banking on Values (GABV) was formed in the Netherlands by 10 pioneer banks with the goal to make the banking system more transparent and support positive economic, social and environmental change. In recognition of this work, GABV was announced as one of the Climate Leaders at this year’s Finance for the Future Awards.

Collectively, GABV serves 60m customers, holds more than $200bn of combined assets under management, and is supported by 80,000 co-workers. The movement also has members from more than 40 countries in five continents.

“Our goal is to foster a values-based banking approach, not just ESG,” says Martin Rohner, Executive Director of GABV. “To the extent that you believe ESG is about delivering a fairer, greener and more resilient economy, the GABV’s members are aligned with ESG. But that is not what ESG always delivers in practice.”

Rohner believes ESG still has a role to play in values-based banking, but the world is too complex and contradictory for ESG alone to make a difference. “For example, how do you weigh fair wages against a reduction in greenhouse gas emissions? You need to be clear about your values framework and the context you are operating to answer such questions.

“ESG is simply a process to align a company with its guiding values. But the top leadership must still be clear about the core purpose and values of the company. And that includes how important profit is for the company,” he adds.

Transparency is key

Rohner explains that ESG can be used for risk assessment – what he calls single materiality. In this area, international collaboration can help to create a standard set of questions that need to be considered when assessing the environmental, social and governance risks for a company or an investment.

However, it will be hard to come up with a standard solution for the second materiality dimension, namely how a company or bank impacts the environment, society and governance.

“What matters more is that the leadership of a company is clear and transparent about the purpose and values that matter to it and then designs a strategy to achieve this purpose. In other words, this needs individual and contextual solutions designed for the company. Accountability must come through transparency about what the purpose of the company really is,” he says.

Be flexible in your approach

What matters most, he stresses, are processes that allow for flexibility and pragmatism. These processes, in turn, are based on the guiding values of an institution and transparency around the decision-making process and outcomes.

“Many of our member banks, because of their values-based focus, finance sectors that have a relatively low impact on the environment and the climate and that foster positive social outcomes. Therefore, it was easier for them to commit to ambitious greenhouse gas reduction targets. While it will not be easy to achieve net zero, our members collaborate to find solutions that work.”

Thanks to GABV’s international presence, it has been able to promote the Partnership for Carbon Accounting Financials (PCAF) methodology for measuring greenhouse gas emissions beyond their membership, helping to extend the initiative worldwide.

About 340 financial institutions have committed to using PCAF, representing more than $85trn in assets, and many of them have learned about PCAF through the GABV, which sits on the steering committee of PCAF.

Reporting with more substance

Rohner says he sees ESG values expressed through ESG buzzwords being used by organisations to make their intentions visible, but now he wants to see the talk being met with action for there to be any kind of change. “The financial industry has been quick to adopt big words such as ‘sustainability’, ‘climate action’ or ‘social impact’. Unless these words are consistent with the overall values of the business, they will not be genuinely transformative.”

Businesses have been talking a lot more on ESG goals during COP27, but one in five of global CFOs don’t believe these goals are considered in decision making at board level, according to an A4S study.

He adds: “ESG, for example, will only have a positive impact if there is a deep understanding and agreement by the senior leadership about the social and environmental impact it wants to achieve through the business.”

Finance for the Future

The 2023 awards are open for entries.

Finance for the Future Awards logo

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