ESG Report for Banking Industry
The International Association of Credit Portfolio Managers (IACPM) has released an ESG report for the banking industry. IACPM conducted a survey of 55 banks and financial institutions worldwide to obtain the impact of regulatory agencies, shareholders, and customers on the development of ESG.
The IACPM survey subjects hold over $40 trillion in financial assets, with ESG content covering multiple sectors such as risk, finance, and sustainable development. IACPM found that although the banking industry is gradually incorporating ESG into its core processes, the actual results still fall short of the plan.
Different Perspectives in the ESG Report
Overall, the global banking industry is facing more pressure. Respondents believe that regulatory agencies (83%), customers (67%), and shareholders (53%) all have higher requirements for the development of ESG in the industry. However, there are two different perspectives in the banking industry when it comes to formulating and implementing ESG’s long-term strategy.
One view is that ESG activities are passive downside risks aimed at meeting regulatory needs. Another view is that ESG activities are upward opportunities for continued development and they can bring new value. The emergence of these two perspectives is related to the risks faced by banks in their current business activities. For example, different banks have different understandings of the financial and transformation risks brought about by climate change.
ESG Development in the Banking Industry
Apart from two perspectives in ESG report, banks in different regions face different ESG issues. Banks in Europe and Asia are more under pressure from regulatory agencies, while banks in the Americas are more under pressure from shareholders. At the same time, European banks are more focused on environmental aspects in ESG, such as managing climate risk and developing a clean economy. Bank of America focuses more on social aspects, such as serving people with different incomes.
The banking industry has also begun to take actions, such as launching green finance products and expanding the scope to auto loans, mortgages, etc., or incorporating climate risk factors into strategic planning and conducting stress tests for credit portfolios. 55% of respondents believe that a net zero strategy can reduce risk costs, while 40% believe it can reduce capital costs. In terms of future development, 58% plan to use proprietary methods to identify and manage climate risks, and 46% plan to limit credit to low-carbon and ESG areas by 2050.
ESG Improvement Measures in the Future
Although the industry is incorporating ESG into its core business, there is still a certain gap. 65% of the respondents have not taken climate data into account in the credit process, and only 40% have quantified risk exposure. IACPM believes that the banking industry can continue to develop ESG strategies from the following four perspectives.
- Integrate stakeholder perspectives to support decarbonization actions. The banking industry can integrate ESG requirements from shareholders, regulatory agencies, and customers by developing decarbonization plans and investing in transitional financial capabilities. For example, combining credit spreads with climate risk in loans, or considering ESG factors in credit risk ratings;
- Prioritize the development of transitional finance. The banking industry needs to develop transitional finance based on emerging technologies and incorporate it into its strategic and core businesses. Board needs to play a role in the design, implementation, and supervision of these plans;
- Develop business that meets customer needs. Although the development of ESG is directly related to the requirements of regulatory policies, enterprises and customers are the main targets of banking services. Banks can issue green loans, sell green bonds, and provide customers with relevant ESG services;
- Enhance climate data analysis capabilities. In the fields of credit management and real estate financing, banks can use relevant data to estimate potential losses under different climate scenarios. Banks need to improve their data analysis capabilities in order to identify and verify new data elements and strengthen climate risk management.
Reference:
ESG as a Source of Strategic Value Creation
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