Long reads

How to bust ESG myths around sustainable banking

Scott Hamilton

Scott Hamilton

Contributing Editor, Finextra Research

Sustainability was front and centre from day one of the SIBOS 2023 global conference in Toronto.

Monday’s first full day of the annual gathering of bankers from across the globe included several sessions that featured themes around the climate and social transition imperatives facing banks as major influencers of corporate behaviour (via their lending and operational relationships with large and small business customers).

How Sibos is pushing sustainability throughout the event

SIBOS sponsor SWIFT – the global banking and trade industry group, adheres to the Science Based Targets initiative (SBTi), noting their commitments to the world-spanning movement’s “ambitious, science-based emissions reduction targets in line with a 1.5 ºC future.” The organisation’s leadership and staff promised to measure the carbon footprint of Sibos 2023 Toronto and use their experience in this year’s conference as a “baseline for further improvement” at future North American industry events under their sponsorship.

SIBOS organisers also requested interested attendees to take a voluntary “sustainability pledge” and commit to at least five “tangible actions” during the week. These included “Caring for the community” by patronising small, independent local restaurants and bars, visiting various charity stands around the venue to find out more about their missions and needs, and generally supporting sustainable businesses with their purchases.

Other pledges asked participants to learn more about SIBOS sustainability initiatives, to connect with those attending on a digital-only basis to foster networking beyond the physical space, or to eschew exchanging paper-based business cards in favour of scanning the QR codes of the badges of onsite attendees with whom they chat in-between sessions or at meals or events, or while stopping at exhibits in the massive vendor hall. This conference strongly encourages all attendees to reuse cups and refillable bottles for drinks, select vegan or vegetarian meals from the many choices offered in the food hall, watch carbon emissions and waste of all kinds throughout the trip to and from as well as during the week – including not taking too much from the buffet line and then leaving lots of food on a plate at the end of a meal.

Many pledge-takers agreed to walk to and from the venue from their hotels, or use the free pass provided with their registration for Toronto’s excellent train and bus system, in lieu of private cars. And, of course, they were urged to attend one or more of the 30 sessions during the conference focusing on one or more topics surrounding sustainability, Environmental, Social, and Governance (ESG) issues.

Why an ESG mindset needs to shape organisations’ DNA

The first session of Monday’s SIBOS 2023 agenda to focus on the topic of ESG was helmed by a local expert – Dr Walid Hejazi, Associate Professor of Economic Analysis and Policy at the University of Toronto Rotman School of Management.

His presentation during the initial hour of the conference provided a primer on all issues ESG, including definitions, the state of the discipline and progress made in academia and the business world, and a special focus on the parts financial institutions play in efforts to make sustainability not just a title, but to embed its best practices and ESG values into every aspect of an organisation’s DNA and operations.

Dr Hejazi heads up his university’s ESG designation program, which is the first of its kind in Canada. Sharing pictures and accounts of recent environmental calamities around the world, he challenged the audience to examine their views and begin to understand the qualitative as well as quantitative issues around ESG.

“The vast majority of people have completely understood the importance of achieving the goal of net zero (emissions growth) by 2050...Clearly, this is a global emergency.” However, he said the human side, which involved changing behaviour of people and those they work for, will be most important in reaching targets for a cleaner world.

Discussing the Paris Agreement to confront climate change impacts, he lamented the lost time and opportunity to get ahead of the problem. “2015-that's already eight years past. The objective of the agreement, which was signed up to by 196 countries around the world, was to achieve net zero by 2050. In order to do that, we have to cut carbon by 45%.These are big, big changes that we have to implement,” especially in the ways business is done across the globe.

The misconceptions delaying progress on critical ESG issues

Dr Hejazi shared four ‘myths’ of ESG with the audience in emphasising his overarching theme, one which has been increasingly understood by those following the rise of sustainability and social justice studies in recent years: ‘it’s not just about the E’.

“It’s much broader, and you think about the social pillar and…the issues of diversity and inclusion, how you treat your employe–s - not just within your organisation, but across your entire supply chain.”

Myth #1: The “S” is often misconstrued as about sustainability. It’s not, it’s about social concerns and practices, such as in the case of several examples Hejazi shared, two of them being Audi and Facebook. He described the debacle when the automaker was caught ‘gaming emissions tests’ with a fraudulent algorithm, and the $725 million fine levied by authorities for fifteen years of improper use of customer data allowed by the social media giant. He also described the embarrassment of a Scottish tea company sued by Kenyan chocolate factory workers for forcing them to toil under terrible conditions.

Dr Hejazi noted not just the reputational risk but very unfortunate, ultimately criminal decisions to force too many employees to work in desperate, dangerous conditions – despite company CEOs in the west who claimed ‘they didn’t know’ about the abuses of dangers of their contracted locations overseas.

Another example raised was the clothing factory in Rana, Bangladesh that collapsed after previously being identified as unsafe to enter. Many notable labels from Europe and America were found on the ‘fashionable’ garments surrounding the 1,134 bodies of those killed and 2,000 injured during that 2013 tragedy.

Myth #2: ESG can be ‘handled’ by a department or a corporate function. “This ‘tick the boxes’ approach is very limited. The organisations that think that its possible to design a strategy and then after the fact bring in the ESG or sustainability officer and ask, ‘Does it meet all of the boxes?’ These are exactly the kinds of strategies that get companies into trouble. These are also exactly the kinds of strategies that limit the ability of companies to really leverage the strategic opportunity that comes with ESG”, he explained.

Myth #3: ESG is about the impact a business has on society and the environment. As the professor pointed out, “it’s not a one-way street,” introducing the concept of “double materiality” and that the impact of embracing sustainable practices goes both ways, as do company decisions and consumer choices to be more earth-and-humanity-friendly in their habits and buying behaviours.

Myth #4: ESG is a form of 'woke’ capitalism. “For those of you that know who Larry Fink (BlackRock CEO) is, you know, he really made waves (with an announcement on ESG’s importance to the investing world).” Asking the audience “Does anyone know how much capital there is available in the whole world to be invested? North of $100 trillion? BlackRock has $9 trillion. In his annual letter, Larry Fink wrote ‘we are environmentalists because we're fiduciaries...and climate risk is investment risk”. He understands that if we don't address sustainability and climate, then companies will be left behind.”

Material ESG change is about more than those three letters

Noting the recent backlash against these ESG myths and charges made of its dangers by others in some US states and political circles, Hejazi questioned the actual impact of these efforts. “The reason they’re moving away for it in the US is because it is so politicised. Yet, when you look at what they’re rethinking what BlackRock have declared, nothing will materially change. They’re still going to pursue these strategies. They’re just going to change the terminology.”

Dr Hejazi emphasised that he’d much rather be talking about positive stories of sustainability awareness and action. He referred to another famous manufacturer to illustrate the point: “Now the gold standard for this is Fruit of the Loom. If you go to Fruit of the Loom website, they’ve got a PDF, and an interactive website that shows where all of their suppliers are. That’s supply chain transparency.”

Why ESG is most effective when woven into an organisation’s fabric

The speaker wrapped up the session by coming back to one of his opening themes: it’s not about assigning someone ESG responsibility as a singular project. The whole organisation must LIVE the discipline for it to be successful in the company, and for the world. He shared examples of how banks can play especially helpful roles by encouraging environmental and social advances and providing positive governance from their executive ranks to support these strategies – as well as in educating their customers. But it has to be ingrained in their DNA, the fabric of the entire organisation from top to bottom, said Dr Hejazi.

Describing a consulting engagement with a major bank, the speaker said: “I took 100 of their senior managers, executives, and I worked with them (on sustainability issues).Early on, the CEO said the following: ‘I don't want my leaders to think it's either or. I don't want them to think that you can have ESG friendly policies OR financial returns. You can have both.’ And [some]people were very sceptical. But after a seven-month journey, working very closely with them, I can't tell you how enlightening it was, how with careful strategy - where you weave ESG into the design - you can develop strategies that yield both financial returns and ESG returns,” Hejazi asserted.

“ESG is a strategic opportunity. Don't think of it just as a cost. It's a strategic opportunity [...] When you deploy ESG strategies, you get environmental diversity and inclusion. These can have real value when they're designed and integrated into the overall strategy” of an enterprise.

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