S&P Global Market Intelligence






Webinar Synopsis — Driving Value Creation through ESG Integration: Three Vital Steps for Every Bank

Environmental, social, and governance (ESG) issues continue to gain the attention of consumers, investors, and other stakeholders who are putting pressure on businesses throughout the economy to take steps to move to a low-carbon environment. As a result, gathering appropriate metrics and reporting on ESG strategies are fast becoming business imperatives. This is especially important for banks that need to consider ESG issues in their investing and lending portfolios.

On June 15, 2021, S&P Global Market Intelligence held a webinar entitled, Driving Value Creation through ESG Integration: Three Vital Steps for Every Bank. Salman Khan, Associate Director, Financial Institutions Product Strategy at S&P Global Market Intelligence and Matthieu Bardout Global Head of ESG Strategy, Banking & Insurance S&P Global Sustainable1, discussed a number of important steps that every bank should take on its journey to becoming ESG compliant. This blog summarizes three key takeaways from the session.

1. ESG issues present important risks and opportunities for banks, and both need to be taken into account. There are two types of risks: (1) physical risks associated with natural disasters, such as hurricanes that can destroy a counterparty’s assets, and (2) transition risks associated with the cost of moving to a green economy, such as government policies that can increase a counterparty’s carbon prices. On the other side, there are numerous opportunities, such as assisting with the transformation of energy production toward renewables and/or plant refurbishments to avoid or capture/store carbon emissions. Given this, it is clear why the most competitive banks are already taking steps to both minimize negative exposures and capitalize on potential new business prospects.

2. There are three steps every bank should consider as they begin their ESG journey:

    • Step 1: Create a climate-risk strategy and governance framework. Top management needs to set a strategic direction for climate-risk governance and establish guidelines for comprehensive internal reporting. Senior management functions should be responsible for identifying and managing climate-related financial risks, so capacity building is important to nurture champions who can have the right level of knowledge and expertise to take things forward.
    • Some banks are taking a decentralized approach on this front, with ESG groups sitting in different divisions. Others have more centralized committees comprised of representatives from different divisions. Both can work but having a diversified group can payoff in the long term, ensuring that ESG issues touch all aspects of the business.
    • Step 2: Integrate climate risks with the credit strategy and overall risk structure. Banks need to deeply embed climate risk considerations within the overall business to effectively evaluate possible current and future impacts of physical and transition risks on clients, investors, and counterparties. This includes activities related to capital allocations, loan approvals, portfolio monitoring, and reporting, where every function should identify, measure, monitor, manage, and report on their exposure using a range of quantitative and qualitative tools and metrics.
    • A granular, bottom-up approach is needed, and there are data challenges that must be recognized. For one, ESG information needs to coexist with traditional financial metrics for holistic analyses. To apportion the positive or negative impacts of ESG to a portfolio, for example, financial metrics are needed to understand exposure to a particular company, instrument, or asset. So, it is not just an issue of integrating ESG data within the organization, but also integrating ESG data with other sources of information. In addition, access to private company data can be problematic, since these firms don’t have the same reporting requirements as public companies. There are creative ways to deal with this, however, by combining off-the-shelf data when available, research techniques, and the use of proxies based on averages of sector details.
    • Step 3: Assess and address climate risks using a formalized reporting framework. Formalizing a reporting framework that addresses a bank's intent and progress around climate risk is of utmost importance. Scenario analyses can help explore the resilience and vulnerabilities of a firm’s business model to a range of outcomes, based on different transition paths to a low-carbon economy. From this, it is important to regularly disclose how a bank is addressing climate risks and evolving its understanding of the financial risks that could emerge.
    • Climate stress testing is very different from more traditional stress testing, however, as the time horizons are much longer. Climate impact assessments are also very complex given the physical and transition components, and the many different ways they can affect a company. Reporting can also be challenging if different teams with different mandates need specific results that are relevant for their particular area.
3. Many third-party providers are expending significant resources to upgrade their ESG offerings. This includes capturing company-level disclosures to report ESG performance levels, integrating public and private data, and building models and financial products to meet the need for high-quality data, granularity, and more sophisticated methodologies.

S&P Global Market Intelligence has been doing a great deal to address the ESG challenges banks face. For example:
    • We are a provider of both extensive ESG and financial data, so have created the information ecosystem that is so important.
    • We have a private company database that continues to expand, and recently launched a program to extend our coverage of greenhouse gas emissions to approximately 6,000 private companies.
    • We combined our data resources and credit analytics capabilities with Oliver Wyman’s climate scenario and stress-testing expertise to launch Climate Credit Analytics that translates climate scenarios into drivers of financial performance tailored to industries.
    • Our Corporate Sustainability Assessment (CSA) is an annual evaluation of companies’ sustainability performance that powers S&P Global ESG Scores and our Corporate Benchmarking activities.
Click here to learn more about our ESG capabilities for Banks.

Request a demo

Id Lacinia Elit Amet Fnibus Bibendum Risus

Phasellus viverra quam quis ullamcorper venenatis orci nulla gravida risus.

Facebook   Twitter   LinkedIn   YouTube
©  S&P Global Market Intelligence. All rights reserved.  Unsubscribe   Update your Preferences   Privacy Policy   Cookie Notice   Terms of Use   Do Not Sell My Personal Information