The transition from 'traditional' to ESG-embracing is a tough one for banks. Silvia Pavoni describes how the solution to this issue may lie within for many lenders.
The group of bankers who joined a recent London seminar on environmental, social and governance (ESG) principles asked about skills: what abilities are required to ensure that financial institutions are sustainable and hold themselves accountable to those ESG standards.
The event was organised by Headspring, a partnership between the Financial Times and IE Business School, and the question was an interesting one. The answer, some suggested, was a ‘millennial’ attitude. But how do you achieve that? Younger applicants do query a potential employer’s commitment to the wider society, not just to the bottom line, and presenting your bank as a good corporate citizen is a selling point for a sector that has lost much of its appeal since the financial crisis.
Showing that a financial institution has ESG policies, targets and initiatives that appeal to younger generations helps redefine corporate culture. These help to placate shareholders and regulators too, as these groups have begun to demand that their subjects prove they take sustainability concerns, particularly those related to climate change, seriously. But change is never easy. There is a natural tension between the old, long-internalised ways and new, unfamiliar ones. Established behaviour is hard to reshape and most of us – whether bank investors, customers or employees – have yet to be truly tested on the potential short-term sacrifices needed to transition to a greener economy.
The right balance
Forcing change to follow ESG goals often means solving complex problems, and not just problems faced by bankers. For example, the oil reserves discovered off the shores of Guyana are set to boost the country's gross domestic product by 86% in just one year and, if well managed, improve the lives of some of the poorest people in Latin America. Measuring the environmental and social impact of the exploitation of oil in this case is far from straightforward.
Who can help bank bosses take such decisions? Top management is often aware and attuned to ESG concerns. The activist CEO is becoming a fashionable new label – worn well at highly visible events such as the recently concluded World Economic Forum in Davos. But knowing how to move, in very practical, more mundane terms, is hard; evaluating the risks related to traditionally profitable but highly polluting clients and the opportunities of new green technology is a genuine challenge.
Sustainable finance tends to be picked as a professional path earlier in bankers’ careers out of a moral vocation, notes a sought-after ESG consultant. But in most cases, he says, those bankers lack the professional clout needed to influence boards and business strategies. They also tend to lack connections with the regulators that would feed insights back to their employers as well as exert some influence over rule makers. The consultant is in regular touch with banks’ sustainability staff. “This is why they call us in,” he says, “to talk to their boards.”
Bad definitions
Third-party advice is not a bad thing, particularly on a new, complex and, in many respects, unruly subject that is still poorly defined by an array of inconsistent and patchy metrics. But if sustainable finance is to be the only viable means of finance within a matter of few years, rather than a generation, banks’ sustainability divisions need more brains from their higher ranks. The job of charting, explaining and helping navigate through a new business route should be taken on by senior and established bankers who have already made a name for themselves in other (money-making) parts of the business, as well as by already committed staff. Of course, a head of mining or aviation clients suddenly contributing to a sustainable finance strategy may raise concerns of ‘greenwashing’ – but the people right at the heart of the problem often hold the keys to its solution.
Creating policies that appeal to new recruits makes plenty of sense. But when it comes to ESG, the stronger push towards change, towards reaching that millennial attitude, may come from the non-millennials already part of banks’ old fabric.
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
