Why the G in ESG matters in times of crisis - Comment & Profiles -

The coronavirus pandemic calls for brave leadership and good governance. This includes banks and other private sector entities supporting citizens and communities economically to survive and recover.

If the environmental or social parts of ESG tend to be the main focus of banks’ strategies, the governance part is often considered the remit of the compliance function.

Financial institutions are accustomed to maintaining appropriate audit and internal controls in order to prove they do not engage in illegal activities, that they know their customers – and avoid the ones with dubious practices. Governance is also intended to safeguard shareholders’ rights, which are important. But with the realisation that stakeholders’ needs must be also addressed, the definition of good governance now needs to be broader. If respecting anti-money laundering regulation supports banks’ licence to operate, so should the way those institutions behave in society.

Governance, in other words, is leadership. And leadership is crucial in a time of crisis.

Private sector role

As the coronavirus outbreak continues to spread across the world, we are all reminded of the importance of strong leaders. While primarily within the governments who must authorise unprecedented measures to protect both their citizens’ wellbeing and their health systems (politicians’ record here is horribly chequered), this extends to large corporations and the financial sector. Less visible than public services, private sector groups can help soften the inevitable economic blow of those measures and their impact on the most vulnerable people.

Straight comparisons with the financial meltdown of 2008 and 2009 are tempting but off the mark. However, the consequences of that global crisis offer a valuable measure of reference: then, $9800bn of wealth was wiped out in the US alone as Americans’ home values collapsed and retirement funds evaporated; the unemployment rate rose to 10%. 

Now, as people’s lives as well as livelihoods are directly affected, economists do not need to wait for official data to know the world is already in recession. The International Monetary Fund is expecting a worrying global contraction. And in an interview with Bloomberg, James Bullard, president of the St Louis branch of the US Federal Reserve Bank, went as far as predicting a 30% unemployment rate and a 50% gross domestic product contraction in the US in the second quarter of 2020.

Call to action

The coronavirus pandemic has yet to manifest in full force in the US, and no one knows when it will peak globally. But until then, and for as long as necessary and feasible thereafter, banks around the world have a key, positive role to play in supporting ailing customers. Many are already doing so.

In Italy, which at the time of writing had enforced a complete halt to all but key economic activities, Intesa Sanpaolo and UniCredit have created emergency credit lines and frozen repayment obligations. A country of 60 million people, Italy’s Covid-19 death toll has surpassed that of China, a country with a population of 1.4 billion, according to official data. Banks elsewhere in the world, including the US, are beginning to offer similar solutions. 

More can be done. If the economy doesn’t turn immediately once the health crisis is over, the chances are that businesses will be unable to repay their previous, as well as their emergency, loans. So where do banks find the liquidity needed to keep their retail and corporate clients afloat?

European rating agency Scope Rating has a proposal, which it details in a recent report: “No management bonuses, no dividend payments or stock buybacks, putting on ice cost-cutting measures entailing staff lay-offs, and avoiding any new risk-generating activity that is not focused on helping businesses and households which are impacted by the pandemic. Under the circumstances, the most rewarding outcome for a bank is not closing a juicy commission-rich deal but saving a business from bankruptcy and its employees from being laid off.”

Banks do need to remain in good shape to avoid worsening an already challenging scenario but this is advice worth looking into. 

The point is worth repeating: banks should embrace their part in alleviating the economic consequences of a spiralling health calamity. In doing so, by helping keep their customers, their staff and their community afloat, they will ultimately prove their resilience. In such times, they need strong leadership. They need good governance.

This is a monthly column focusing on ESG principles and how they are reshaping banking, markets and investment. We would like to hear your views on sustainable finance, how it is changing your organisation, your work and your incentives structure. Contact silvia.pavoni@ft.com and, on Twitter, @Silvia_Pavoni

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