Environmental, Social and Governance (ESG) Advisory as Value-Added Service for Banks and Financiers

By: Zeng Han Jun

A study was conducted in 2021, on the mission statements of 122 publicly listed companies from countries including Estonia, Poland, Hungary and others. It tried to show how these companies’ mission statements changed from 2012 to 2021 and it clearly showed that there is a inclination towards/ away from using certain terms. I reformatted it in a table format for easy reference:

Higher Usage (Weightage) Lower Usage (Weightage)
Responsible (+7) Shareholder (-10)
People (+7) Position (-9)
Innovation (+5) Profit (-8)
Community (+4) Lead (-6) 
Society (+3) Consumer (-6)

 

Other interesting terms that are becoming increasingly popular are: Sustainability (+1), Long-Term (+2) and Environment (+2) (Zumente, Bistrova, 2021). 

Broadly speaking, it seems like there’s a growing shift in that part of the world towards the Environmental, Social and Governance (ESG) branding, especially the part on Social. The study did not touch on the operational aspects therefore it is impossible for us to form any opinions on the operations.

I also noted that in 2018, the Governance & Accountability Institute revealed that 86% of S&P 500 firms released sustainability or corporate responsibility reports, compared with just under 20% in 2011 (GA Institute, n.d.). The gradual change in branding and reporting is somewhat evident. Well at least to me, it indicated that there is a growing awareness of ESG issues and challenges. It is good enough for me to learn that corporations have started to shore up their images. By right, it should be natural for these companies as the next step, to re-engineer its operations to meet ESG standards. A lot of people talk about “Green Washing”. “Green Washing” is like keeping a good, nice and green façade while the same toxic culture and pollutive operations persist. Based on the study, I am unable to derive more information about this therefore I cannot comment on this. 

Anyway, I have another thought to share; The younger generation are brought up differently. Technology is an essential part of their lives. Communication is instant and information sharing is… happens at quantum speed. Remember, these same people will be part of the future workforce and they are a group that do not suffer injustice easily. A bit of wrong doing here and some covering up there, usually end up becoming viral in the most popular social media platforms. This usually does not end well for the corporations’ stock prices and earnings. 

Additionally, many of these younger people live in clouds of digital tribes. People from all corners of the globe gather digitally in these tribes, for their hobbies such as photography, certain computer games, food, etc. Races, languages and religions might not matter that much when it comes to such associations. More important is the shared interests and hobbies that eventually lead to forging increasing empathy among geographically far-flung communities. I am certain that gamers from around the world are still gathering digitally for their latest runs/ practices of DOTA 2, League of Legends, Starcraft or whatever computer games that they have been playing prior to the pandemic, even when countries are closing their borders to prevent the spread of the Covid-19 viruses. 

The thing is, ESG isn’t exactly new. Similar concepts have been floating around for the past two decades or so but in recent years, growing awareness of environmental and human management issues have been quite instrumental in enveloping various terms like Responsible, Sustainable, etc under the broader umbrella of ESG. In a way, this new incarnation might help the industry to focus on what truly matters, in order to steer our ecosystem onto the sustainable development pathway. 

Then again, I need to remind myself time and again that ESG standards assess businesses and investments from an environmental, social, and governance perspective. No matter the scenario, there will always be the early adopters who are usually few in numbers. A large number of the remaining pack will adopt a wait-and-see approach. Some will not even know what is happening. When the wave comes, many will again be playing the catching-up game and initially get a low ESG score. 

Now, a low ESG score does not mean that the lenders, financiers and investors need to drop that business from the balance sheet. In lieu of that, this group of commercial entities are in the best positions to act as chaperones, advisers or consultants to improve the firms’ ESG scores and mitigate ESG-related risks. 

Mainstream banks are in a good position to assume this front. Their exposure to the entire market segment stretches from the micro to large caps and across all industries. This can mean two things to me at this point of writing: a risk or an opportunity. If you are the risk manager type of personality, you might perceive that banks are now exposed to the full range of risks from ESG challenges. Flip it around and it could be an opportunity to further value-add to the customers’ businesses by providing ESG advisory services. This line of business could even lend itself as an additional anchor to diversify value-added services, mitigating risks during times of digital upheaval.   

Advisory has always been about delivering values. ESG advisory even more so during these times, helping customers to deliver better long-term sustainable profits.  It is a win (Bank) – win (Customer) – win (Environment and Social) situation. Certain groups of bank employees could be identified and retrained in ESG advisory. They must be encouraged to understand the greater purpose behind the ESG drive. It is not just about the increasing number of investors and financiers who want to align their money with these ESG values, but more about the greater benefits to the larger ecosystem. The idea of contributing to the greater good could sometimes even be invigorating for some people. Well, ESG standards ultimately are about earning the money without causing negative impacts, right? 

Some food for thought. 

References

Navigating the Way to Sustainability. (n.d.). Retrieved from Zumente, I., & Bistrova, J. (2021). ESG Importance for Long-Term Shareholder Value Creation: Literature vs. Practice. Journal of Open Innovation: Technology, Market, and Complexity, 7(2), 127. doi:10.3390/joitmc7020127

 

Copyright © 2021 Zeng Han-Jun. All Rights Reserved.

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