December 2021 marks six years since the Paris Climate Agreement was adopted by 196 parties at COP21. The world’s biggest enterprises by revenue have a pivotal role to play in the transition to a low carbon economy and ESG-led future. Banks have not only poured millions of dollars into establishing best of breed ESG teams and marketing their capability, but a growing number have also walked away from millions in revenue after cutting loose clients and projects that do not align with their new, greener image and policies.
A recent report by East & Partners’ titled Finding the Value in Green Banking finds that while traditionally global banks dominated the top rankings, Asian and US banks received top marks for their lack of ESG credentials and inactivity on climate change. We speak with Martin Smith, global head of markets analysis at East and Partners, about the reasons for Asian banks lagging in this area and what they can do to improve their ESG credentials.
Unravel: The report’s findings show that Asian banks lag their global peers in meeting sustainability and ESG targets. Why is this so?
Martin Smith: Asian banks are lagging due to poor level of engagement expressed by CFOs and treasurers dealing with these banks. There is a distinct lack of proactivity which is a noticeable point of difference between Asian banks and European banks.
For example, among the top 10 most proactive global banks actively reaching out to customers to look at sustainable financing and mitigating their own environmental, social and governance (ESG) risks, seven are European banks. In stark contrast, three of the least engaged banks globally for proactive customer ESG interaction are based in Asia. Notable exceptions include Singaporean banks such as DBS and OCBC, who compare favourably to their regional counterparts in terms of active engagement with customers relating to sustainable finance specifically.
Unravel: What must Asian banks do better?
Mr Smith: For Asian banks the challenge involves changing perceptions and winning customers minds, given that three Asian banks have been singled out to have the least credential and slowest to act on climate change. It is also worth noting that there is a high proportion of large corporates globally who are unable to form a coherent view (48%).
What Asian banks can do better is focus their client and market communication with sustainable and ESG policies. At the same time, they need to actively engage their clients in conversations around their risks and how sustainable finance can complement their existing working capital and debt solutions.
Unravel: Singapore is different in this respect. Is this a simple emerging market vs developed market outcome, or are there other factors that contribute to the different levels of ESG adoption between Singapore banks and banks elsewhere?
Mr Smith: Certain markets are at different stages in their level of sophistication and adoption of ESG targets and green compliant financing with a high number of influential variables impacting the pace of change.
For corporates, the top three drivers behind their ESG financing decisions are financial returns (25%), investors (20%) and marketing applications (14.6%). What is limiting banks adoption elsewhere is the underlying level of ambivalence towards progressing new opportunities, which is shown by one in two corporates globally not yet engaging with ESG funding.
For instance, corporates based in the UK and Germany are more than five times more likely to have a dedicated chief sustainability officer or head of ESG role than corporates based in China or Hong Kong. A steep learning curve remains embedded among customers and without customer demand driving product and service development among banks in Asia, the gap between them and their global counterparts will continue to widen.
Unravel: What are some barriers to adoption of ESG policies?
Mr Smith: Some barriers to adoption of ESG policies include unclear definitional terms and conditions (25%), opaque transparency and compliance that falls out of line with international standards (22%) and a lack of digital transactional platform functionality (17%). These are rated as the top three factors banks are missing from their ESG and sustainability offering globally, limiting broader uptake of ESG policies.
Additionally, the report shows that one in two of the top 100 revenue ranked corporates across eight major markets globally currently have ESG policies in place with 19.6% of business assets aligning with these policies. The UK and Canada soar above the global average with almost 70% of corporates with ESG policies and around 20% of business assets aligning with these policies. Conversely, in China, only one in five corporates implement ESG policies and less than 7% of business assets align with these policies. The slow uptake by Chinese corporates who often conform to traditional methods of doing business is clear from the research.
Unravel: What is being done to address these barriers?
Mr Smith: For the most part, corporates are taking matters into their own hands and turning to their core lender for advice (18%), specialist consultants (10.5%) or investment banking partnerships (8%). Ultimately, banks that fail to address these key concerns will suffer customer churn as corporates switch more of their business to other banks on their panel who can address these concerns.
Unravel: How much of a challenge is greenwashing?
Mr Smith: In certain markets greenwashing remains a major challenge for CFOs and corporate treasurers, reflected in the lower success rate of request for proposals (RFPs) in China and Hong Kong compared to global markets—at 26% and 55% respectively—compared to the worldwide mean of 60.2%.
The challenge of identifying greenwashing is becoming harder as ESG concerns become mainstream for investors and portfolio companies. However, this challenge can be addressed. For example, Singapore invested an additional sum of $180 million on two artificial intelligence programmes launched as part of the country’s tactics to use technology to effect social and economic good.
Unravel: What impetus does Asia require to boost the green finance market in the region?
Mr Smith: First and foremost, greater proactivity is needed. If Asian banks aren’t contacting their customers with meaningful ESG content and sustainable finance solutions, they can be assured that their European, North American and Australian counterparts are competitively pitching to win their business away from them. This would potentially lead to a loss of business elsewhere across the commercial banking suite such as cash management and vanilla lending.
Unravel: How important are consumers (companies seeking financing) in all of this?
Mr Smith: This is arguably the most important factor. Without customer demand, banks are not compelled to align their product and service proposition to service customers who themselves are responding to growing appetite among their own customers, employees and supply chain to acknowledge climate risks and to achieve accreditation for green friendly financing and enact concerted policies to address this.
Martin Smith is global head of markets analysis for East & Partners, based in Sydney. He oversees in-depth research and analysis to banks and financial services clients across institutional, corporate and business banking markets in addition to implementing client thought leadership initiatives.