Why does sustainability matter in banking and…
Sustainable banking implies taking the environmental, social, and governance (ESG) effect of banking operations and activities into account. By prioritizing…
Climate change, the degradation of the environment and biodiversity, the increasing social and sanitary issues might impact individuals as well as corporates’ operations and businesses, and ultimately have economic consequences for banks financing them. Banks must consider the risks and the opportunities arising from the societal and political shift towards more sustainability to ensure their stability, resilience, and growth.
On the other hand, there is a global pressing objective to support and finance efforts towards the transition to a low-carbon, climate-resilient and sustainable economy. As key financiers of the economy and financial intermediaries, reaching such objective can only be successful through banks’ collaboration with their customers and stakeholders, especially in Europe and Luxembourg where banks are at the core of the financing of the economy. Therefore, the true question is “Why are banks so important to sustainability?”.
Each bank’s business model is different, and their products and services have their own impact and exposure to sustainability factors. However, the evolving regulatory framework, the political agenda (especially in Europe) as well as the growing expectations from clients are increasingly translating into banks’ strategic priorities and activities.
Banks must be dynamic in adjusting their products and services to reflect change in policies, in technologies and the state of the transition of their clients. This will ensure that the most advanced actors will mitigate the adverse impact of the transition on their activities. They will be pushed to develop innovative strategies to address transition considerations and ultimately ensure positive contribution to sustainability objectives.
There are multiple challenges so let me mention three of them:
1. designing the right approach,
2. developing or acquiring the relevant skills and
3. having access to trustworthy and high-quality data.
1. There is no “one size fit all” approach to addressing sustainability concerns, the challenge is to capture the complexities arising from the emerging sustainability priorities and objectives in order to make the right strategic decisions to best support clients’ own transition and ensure banks’ long-term resilience. This means for banks to further engage with their clients, to closely collaborate on transition plans and identify the most appropriate financing alternatives.
2. To be able to navigate the new regulations and the growing sustainability expectations of clients, banks must also upskill their staff and attract new talents with the relevant expertise, including even a scientific background to effectively embed sustainability into their activities and operations.
3. Finally, banks must be credible in setting their objectives and transparent about progress made. This requires huge amount of information that are often not available, comparable, or consistent. Banks are devoting significant resources to collect and check data on climate, governance, carbon footprint. ESG scoring is used to support their investment decisions as well as their risk management.
While the existing regulatory context on sustainable finance provide for detailed requirements for the banking sector, sustainability is increasingly perceived by banks as a strategic business priority rather than a compliance tick-the-box exercise.
Banks are committing considerable resources to comply with regulatory requirements and are actively involved in many ABBL working groups on the matter. The challenge lies in the complexity, the sophistication and the rapid evolution of the regulations which requires regular monitoring and adjustments to policy and supervisory priorities.
Enhanced dialogue with clients and other stakeholders is key to address regulatory considerations as well as demand evolutions and market changes, so that evolves from a regulatory exercise to a joint effort towards transition and a more sustainable economy.
About the blog:
There is an urgent need for rapid transition to global sustainability. Business and industry have enormous social and environmental impacts. "Why does it matter?" is a bi-monthly blog that aims to elucidate this important topic through the eyes of our experts.
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