Discussions around climate change and wider sustainability factors still need focus and a sense of urgency.

silvia

At a social gathering a few days ago, after introducing myself and what I do, the person opposite me quipped: “I wish there were no ESGs.” He was a private equity investor. And found existing attempts at measuring environmental, social and governance (ESG) factors pointless and, worse, misleading. His frustration was palpable.

As the editor of a newsletter about sustainability, Sustainable Views, my conversations with bankers, asset managers or corporate chief financial officers tend to centre on how to best measure ESG factors, rather than on willing them gone completely. But the private equity investor is not alone in feeling that patchy, approximate methods may be doing more harm than good. Greenwashing is still very much a concern even for ESG evangelicals and efforts to define and disclose data have yet to bear fruit.

Indeed, the use of ESG data to guide investment and measure performance is arguably probably more art than it is science. Similarly, there are flaws in the use of that data for risk management. After its first review of banks’ preparedness to deal with climate and environmental risks, the European Central Bank (ECB) concluded that lenders under its supervision missed the expectations it had set out a year ago. A total of 112 banks with combined assets of €24tn were part of this analysis.

In spite of some general progress, the ECB found that more than half of the lenders have no concrete plans to embed climate and environmental risks in their business strategy and that only a “[few] institutions have made any effort at all to take stock of the type of data they would need in order to identify and report internally on [climate and environmental] risks”.

Worryingly, it also found that physical risk – arguably the most intuitively understandable of this set of concerns – was a “blind spot” for most institutions. Banks appear better prepared for transition risk, which tends to relate to the phasing out of certain activities as prescribed by policy-makers.

Is regulation felt to be a more immediate threat than the actual physical manifestation of climate change? While the EU taxonomy is mandating assets’ denomination (green or otherwise), are flooding or other severe events still not perceived as real, regular and worsening threats in Europe? Is climate change still not real enough? 

Anecdotally and separately from the ECB review, a board member of a regional lender admitted that when looking at financing a real estate development on the coast of Poland not long ago, the firm ignored the risk of flooding until the board member urged them to think again. It was not a risk that had crossed their mind.

When it comes to climate and wider sustainability factors, there are still a number of big issues to tackle: defining, collecting and analysing useful data is one of the very top priorities. Finding an effective way to include ESG considerations into business strategy deserves effort and attention. And sharing pertinent information with and for financial professionals needs to be better thought out too, so that environmental and social concerns are not simply dismissed as a cynical basis for empty slogans. This is where us journalists, not just bankers and investors, should also try harder.

Silvia Pavoni is economics editor of The Banker and editor of Sustainable Views.

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