The ESG – environmental, social and corporate governance – code has been drilled into bankers. But, asks Brian Caplen, will it all go out the window in a recession?

It has taken a financial crisis and a decade of hard work to establish in banking the principle that the business needs to be about more than just money – if, that is, banks are going to prosper in the long term.  

This transformation is by no means universal and by no means complete. But it is true that it has impacted all parts of the business starting with retail where the trend is for multiple products to be replaced with fewer simpler ones and for a financial assessment of the customer to be centre stage in the selling process.

In private banking, sustainable and green are the watchwords for investments and even those hardcase capital markets and investment bankers are designing their structures differently and taking the ESG boss out to meet clients. Who would have thought it?

One helping hand has been the realisation that ESG makes good business as well as social sense. Bank of America Merrill Lynch, which is at the forefront of the push to have ESG considerations integrated into the business, produced a report showing a strong correlation between companies with low ESG scores and poor stock performance. “Based on our analysis of companies with ESG scores that declared bankruptcy, an investor who only held stocks with above average ranks on both environmental and social scores would have avoided 15 of the 17 bankruptcies we have seen since 2008,” says the report.

But now for the hard part: sticking to the guidelines when markets and business are tough. To make this work the message must have hit home through all the layers of management and right to the top. Otherwise a manager under pressure to make short term returns is going to take a short cut…. and then we’re back to where we started.

Brian Caplen is the editor of The Banker. Follow him on Twitter @BrianCaplen

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