Three Reasons to Keep Focusing on Environmental, Social and Governance Factors | Deloitte Netherlands

Blog

Three reasons to keep focusing on environmental, social and governance factors

Banks investing in ESG outperform banks that don’t

The COVID-19 crisis is changing priorities within organisations. Banks should, however, continue investing in measures across the environmental, social and governance (ESG) space, even if regulatory measures on ESG risk reporting are postponed. One important reason: value-based banking not only benefits society, but also banks.

Europe’s financial system plays a crucial role in the creation of a greener and cleaner economy. Banks and investors can harness their financial power to encourage business models that avoid contributing to climate change, pollution, environmental degradation and human rights and labour abuses.

Purpose-driven banks are well aware of their responsibilities. Many have already voluntarily adopted and implemented a broad range of sustainability practices in response to stakeholder expectations and emerging challenges across the ESG space.

But the COVID-19 crisis is shifting priorities, which makes sense. After all, a crisis must be managed. In addition, it is expected that many planned regulations have been or will be postponed.

Deloitte Insights Advancing-ESG-investing

Three reasons for a strategic ESG focus

We encourage banks to keep focusing on ESG from a strategic perspective. Here’s why:

  1. Banks with a good performance on material ESG issues outperform banks with a bad performance on the same issues by more than 2 percent. That’s according to a recent study of the world’s largest 100 commercial banks carried out by the European Investment Bank, the Global Alliance for Banking on Values (GABV), Deloitte and KKS Advisors. In April, the Financial Times reported that in the previous month, "More than half of ethical investment funds have outperformed the wider global stock index in the market downturn."

  2. Banks that continue to invest in ESG will have first-mover advantage when the crisis is over. The current crisis might draw attention away from ESG factors now, but when things start to normalise, stakeholders might turn their attention towards them again. Some stakeholders, meanwhile, continue to focus on ESG factors.

    Consumers, investors and potential employees for whom ESG factors are important will focus on the early ESG adopters. This could increase their market share, bring in more investments and provide an edge in the war on talent.

  3. The first-mover advantage also applies to regulations. New regulations might be postponed due to the crisis, but they won’t be cancelled. After the publication of the European Commission's Action Plan on sustainable finance in March 2018, several national and international legislative proposals followed. The European Banking Authority (EBA) published its Action Plan on sustainable finance last December. In March, the Technical Expert Group on sustainable finance published its final report on EU Taxonomy; the European Commission will use this report to further develop the Taxonomy Regulation. DNB, the Dutch National Bank, recently published a ‘Good Practice’ consultation document providing "non-binding guidance on how banks can organise their processes and procedures to manage the climate-related risks related to their activities."

    In its Q&A section of the document, DNB emphasises that "as climate-related risks may manifest itself through existing risk types that potentially result in significant financial losses, banks should manage these risks in a way that reflects an appropriate application of the applicable regulation." In the report ‘Values at risk?’, DNB also states that: "Financial institutions need to have a 360-degree view of the risks they face and be aware of how environmental and social risks contribute to their aggregate risk position." EBA’s ‘Guidelines on loan origination and monitoring’ also state that: "Institutions should adopt a holistic approach, and incorporate ESG considerations in their credit risk policies and procedures."

What to do?

The Taskforce on Climate-related Financial Disclosures, DNB’s reports and the EBA Action Plan offer excellent guidelines for measures across the ESG space. In our next blog, we will advise you how to measure and quantify those risks.

We want to add our voice to the overall message of J.P. Morgan’s 5th Global ESG Conference in March: "COVID-19 and the upcoming recession will not mark the end of the necessary transition towards a more sustainable financial system and economy. They could drive the 'greatest reallocation of capital of the 21st century’."

More information

If you are interested in this topic and would like to have more information you can read our Deloitte Insights reports on Advancing ESG Investing. Do you have any questions or do you want to discuss opportunities, feel free to reach out to Harvey Christophers, Eric de Weerdt or Anne-Claire van der Wall Bake-Dijkstra via the contact details below. 

Did you find this useful?