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18 April 2023 Blog Banking SaaS Private Sector

How ESG Is Impacting Banking and Beyond

How ESG Affects Brand Reputation and Investment Opportunities

 

Environmental, Social and Governance (ESG) is becoming increasingly important for organisations across all industries. Today more than ever, it’s expected for businesses to follow ethical practices that support sustainability and social responsibility to work towards a more positive future.

Organisations that fail to meet ESG standards risk facing regulatory fines, falling share prices and reputation damage. In a study by PwC, 76% of consumers said they would stop buying from companies that mistreat the environment, their employees, or the community.

In this article, we’ll explore how ESG factors play a part in your business’s success and directly impacts your ability to borrow. We’ll also discuss how ESG is affecting the banking industry, and why sustainability-linked loans are helping firms stay accountable to ESG objectives. Plus, we’ll explain more about Formpipe’s mission to drive ethical and sustainable business practices for ourselves and our clients. Read on to find out more.

 

The journey of ESG in banking and beyond

 

The concept of ESG is hardly new, with its origins dating back to the 1960s as a form of socially responsible investing. However, as the world becomes more conscious of the responsibility that businesses have in managing their environmental and societal impact, the significance of ESG is growing.

The increase in awareness and focus on sustainability issues has led to a push for greater standardisation and disclosure of ESG data and metrics. Frameworks and standards have been developed to help companies report on their ESG performance and create greater transparency.

Meanwhile, regulations are also being introduced, such as the EU’s Sustainable Finance Disclosure Regulation (SFDR). Launched in 2021, it requires financial market participants and advisers to disclose how they integrate sustainability risks into their investment decision-making process.

It’s no longer ‘nice to have’ ethical business practices, instead, there must be demonstrable and benchmarked ESG efforts - and these make a direct impact on an organisation’s financial success.

 

How ESG efforts boost reputation and share price

 

The growing recognition of the role that companies play in addressing social and environmental challenges has created a huge increase in the focus on ESG among investors, stakeholders and customers.

Today, 51% of investors say they prioritise socially responsible investments. Publicly listed companies following ESG-friendly practices could see their share price rise due to increased demand.

On the flip side, companies with poor ESG performance may have trouble gaining financing as investors will be hesitant to back them. Businesses could also face regulatory fines for not meeting ESG standards, which would again negatively impact profitability and shareholder confidence.

Improving reputation and brand identity is another key reason for companies across all industries to implement sustainable practices. Organisations that are seen as environmentally responsible are more likely to be viewed positively by customers and employees. By ‘going green’ and reducing their carbon footprint, companies can improve their brand reputation and attract customers who are looking for eco-friendly options.

By the same token, recruitment and retention can be strengthened by social responsibility. Prioritising workplace issues such as diversity and inclusion, fair labour practices and supporting charitable causes, can make organisations more appealing to potential candidates and boost loyalty among existing employees. In fact, organisations with the highest employee satisfaction had ESG scores 14% higher than the global average.

 

ESG in banking today

 

Sustainability goals and ESG principles are becoming more important for banks and financial institutions - not only in terms of their own goals - but also when it comes to the risks and opportunities they must consider as lenders.

As with any business today, banks and financial institutions are expected to follow ethical practices. 67% of consumers now place high importance on banking with organisations operating sustainably and using their money for positive change. That’s why there’s been a rise in popularity across ethical and eco-friendly banks such as Triodos - which only finances companies that benefit people and the environment.

With this in mind, ESG considerations are increasingly being used in investment and lending decisions by banks. Banks are more likely to invest in, or lend to, companies with strong ESG practices, and they may also offer investment products that consider ESG factors.

Tech is an industry faring well when it comes to ESG ratings from investor research for a number of reasons:

  • Low-emissions: Tech companies have been leading the way in reducing their carbon footprint through initiatives such green energy usage and low-emission cloud technologies.
  • DE&I and social responsibility: Many tech firms have implemented programs to improve workforce diversity, support underrepresented communities, as well as being active in philanthropy.
  • Governance: Tech companies typically have robust risk management and compliance frameworks in place, which contribute to their positive governance ratings. For example, Microsoft and Infosys are among the top 50 companies leading in corporate governance.

 

So, it’s no surprise that most of the world’s largest ESG funds have over 20% of their assets in technology. Google, Microsoft and Apple are some of the most widely held stocks among ESG funds.

However, the current lack of standardisation and reporting, along with some accusations of ‘greenwashing’, are putting some firms under scrutiny. In the US, the SEC is tightening rules on funds labelling themselves as ‘sustainable’ - with some financial services firms such as Morningstar being stripped of ESG titles.

In a recent study, MIT researchers found that ESG rating downgrades have a “pronounced negative” effect on buy-and-hold returns. For a one-year holding period, the researchers found that the downgrades lead to an abnormal return of -2.37%. The same study also found that “fund managers use ESG ratings mainly to comply with ESG mandates rather than treating them as updates to firms' fundamentals”. As such, more needs to be done to incorporate ESG into strategic planning and reinforce investor confidence in ESG.

 

The rise of sustainability-linked loans (SLL)

 

To help themselves remain accountable to ESG targets and sustainability expectations, many companies are turning to sustainability-linked loans (SLL). These are loans that have specific sustainability targets or performance objectives linked to the interest rate. Objectives could include reducing carbon emissions, improving energy efficiency, or increasing the use of renewable energy sources.

What are the benefits of sustainability-linked loans?

Incentivised sustainability

SLLs provide a financial incentive for borrowers to implement ethical business practices by linking the loan's interest rate to sustainability targets or performance objectives. This can help drive positive environmental and social outcomes.

Lower cost of capital

By achieving its sustainability targets, the borrower may be eligible for a lower interest rate, which can help reduce its overall cost of capital.

Improved brand perception

By demonstrating a commitment to sustainability and responsible business practices, borrowers can enhance their reputation with stakeholders, including investors, customers and employees.

Customisable KPIs

SLLs are usually structured using key performance indicators (KPIs) that are tied to the loan's interest rate. These KPIs can be tailored to meet the specific sustainability goals of the borrower, like carbon consumption or water use.

Allows banks to support sustainability

By incentivising borrowers to implement ethical business pursuits, banks have the opportunity to show their support for sustainability. This helps financial institutions align their lending activities with their ESG objectives and attract socially-responsible investors.

Positive impact

By encouraging sustainable practices through SLLs, banks can have a positive impact on the environment and society, contributing to a greener future.

 

How Formpipe follows ESG practices

 

Here at Formpipe, ESG is at the forefront of everything we do, underpinning how we act on a daily basis and at the heart of our software development. Our solutions enable your organisation to embrace digitisation and reduce your resource demand. We can demonstrate how using Formpipe enables our banking clients to achieve their ESG objectives by reducing carbon emissions and improving organisational efficiency. Additionally, our clients can be sure of working with a company with a social conscience.

All of our core products such as Lasernet and Autoform DM are available as Software as a Service (SaaS) through Formpipe Cloud. This means your document management solution is simple, fast and secure, while also being positive for the planet.

We recently collaborated with an ESG partner to identify our existing ESG strengths and identify areas of improvement. Formpipe’s culture and values delivered a high score in areas of Society & Governance. This data is backed up by our cNPS score of 62, placing us in the 100th percentile alongside major players like Microsoft, Adobe and Apple.

 

To find out more about Formpipe’s products and services, contact us or book a demo.

 

 

 

Author
Joe Ferro & Jamie Oliver