Long reads

Banks as ESG partners: ensure cautious corporates don’t get left behind

Mladen Levanic

Mladen Levanic

Head of Infrastructure and Energy & ESG Advisory, Commerzbank AG

Commerzbank’s Mladen Levanic, managing director and head of sustainability & ESG Advisory, and Wolfgang Vitzthum, director of real estate & ESG Advisory, delve into the complex world of corporate sustainability and explain why even the smallest businesses should be paying attention. Soon, no corporate will be beyond the reach of environmental, social and governance (ESG) pressures.

In the wake of recent climate change summits, ESG has become a thoroughly global priority, pervading society, politics, the economy and, crucially, businesses. There is now widespread awareness among corporates of their responsibilities, in terms of sustainability – with environmental issues thrust firmly into the spotlight.

As governments, banks and regulators expand their own requirements for the markets in which they operate, the challenge now is for corporates to keep up with this rapid and fundamental change to the way they do business.

There is no avoiding it, ESG-compliant financing will soon be the new normal – and it already is for a large and fast-growing part of multinational corporates, especially those active in capital markets. This may come as a shock to some corporates who are yet to prepare. But the time to act is now if they want to maintain their position in the market and continue to successfully participate in supply chains.

It should, in fact, be a strategic imperative for corporates to instil sustainability principles into their business models and financial setup if they are to seek future funding opportunities.

A complex regulatory landscape

An unclear regulatory landscape as well as a number of initiatives and standards, however, means that actioning an ESG strategy is not straightforward. Corporates are faced with a complex, sporadic ecosystem that can impede meaningful change.

There currently exists a level of regulatory framework for larger corporates – in the form of the EU Corporate Sustainability Reporting Directive (CSRD) – but when it comes to details, ESG reporting still lacks a standardised approach, making it a difficult for corporates to navigate.

Standardisation is therefore a top priority for most policymakers, regulators, and capital market participants. Mandatory disclosure is an impending possibility for even more corporates, and this will pose further challenges for businesses.

Once adopted, the EU Taxonomy is expected to provide additional guidance, but it is important to note that standards are continually evolving. To keep up, the relationships banks have forged with their clients are proving vital. Banks provide insights into prevailing regulatory ESG developments and capital market requirements, for example – not to mention sector specific ESG standards and those imposed on credit processes.

There is no one-size-fits-all strategy

Naturally, a business’s sustainable transformation will depend on the sector and geography in which it operates – but will primarily be affected by its size. For instance, large multinational companies already face much more scrutiny than small- and medium-sized enterprises (SMEs).

But even small companies are not immune to the demands of financiers and fellow supply chain participants. There is now increasing expectation among SMEs to adhere to certain requirements set by their larger counterparts. Corporates can undoubtedly effect positive change both within their own businesses and the wider supply chain, a role that is often overlooked. Large multinationals play a particularly important role in setting standards and steering sustainability targets across their supply chains. 

There is no arguing the urgency around implementing sustainable goals and practices. Every sector and indeed every individual company will need to either work on the constant progression of their ESG (funding) strategies or tailor one to suit their circumstances. This will need to be in connection with financing tools and be enacted within a practical time frame. A considered approach is essential, as ESG will affect all aspects of a business.

Formulating realistic and effective strategies, and implementing ESG-compliant financial products and reporting processes, of course is much more affordable for larger corporates. But it’s a different story for SMEs that may not be in the position to dedicate resources and personnel to tackle the issue. While some smaller companies do produce sustainability reports – often simply an informal set of KPIs – they will need in-depth guidance and advice from their banking partner on how to improve and use these more effectively for funding purposes. However, there are a number of corporates, usually among SMEs, that remain hesitant to act on ESG at all.

ESG compliance will soon be the norm for all businesses, but the time for action is now. Tolerance for those who fail to act sufficiently is diminishing rapidly among market participants and consumers alike. We are already seeing corporates that do not comply with minimum standards face penalties and exclusion from supply chains, not to mention being deemed ineligible for funding.

The power of bank-client partnerships

Many financial institutions (FIs) have taken up the reins as natural drivers of wider economic change by promoting and implementing solutions to stimulate a sustainable transition.

Banks can help to underpin ESG strategy and make it more credible by linking sustainability KPIs with loan margins, for example. Banks can offer their clients in-depth, sector-specific advice – supporting solutions that enhance the sustainable journey of each business.

The sustainability transition, by definition, involves large-scale, fundamental changes to established systems. That’s why collaboration is crucial. Any corporate looking to formulate their own in-depth ESG strategy can turn to their banking partner. Banks already act as trusted advisors in other aspects of business – sustainability matters should be no different. Banks can advise on where to start and help navigate the current regulatory landscape, while appropriate financing products can incentivise the transition.

Banks should aim to make banking and capital market requirements more transparent, while offering suitable financial products that can support clients on their own sustainability journeys.

All businesses are undergoing fundamental transition processes of their own, but it’s a journey that doesn’t have to be taken alone. With an experienced bank, corporates can make sure they don’t get left behind by the sustainable transformation.

Comments: (1)

Richard Peers
Richard Peers - ResponsibleRisk Ltd - London 22 February, 2022, 14:42Be the first to give this comment the thumbs up 0 likes

thanks for the very relevant contribution Mladen