Sustainable banking: The growing focus on ESG

Banking horizons

Video | February 2020 | 05:57

Video Details

Sustainable banking: The growing focus on ESG
Alain It’s increasingly apparent that the banking sector has a major role to play in our response to climate change and other ESG issues more broadly. Today, I’m joined by Milana Chamberlain, who heads up our global ESG initiative. Milana, what does sustainable banking actually mean for the banks?
Milana Sustainability is loosely defined as environmental, social and governance agenda, which is being incorporated into business decisions and investment decisions in organisation.  For banks, it’s mainly the implementation of sustainable development goals and obviously the area of combating climate change. There is a huge framework which is developing through global, European and EU initiatives. There are major developments on the reporting about climate change and identification of climate change risk which is coming through taskforce and climate-related financial disclosures, or TCFD recommendations about how to tackle climate risk and how to report about this subsequently. In Europe we now have the EU green deal. In the UK, there is a huge initiative led by the government in relation to the green sustainable strategy. All of this is actually resulting in various imitative in terms of putting together standards for green products like green loans, green bonds, sustainability-linked products and also in relation to other areas like business and human rights, which is not necessarily climate change as such but it’s hugely connected to the climate change impact.
Alain So you talk about frameworks. How are these frameworks actually being translated into specific actions?
Milana I think the most important one is really in relation to the climate change reporting. Banks are being encouraged to take up the voluntary reporting principles which are set out by TCFD. The recommendations were not very detailed. The United Nations Environmental Programme Finance Initiative invited 16 major banks to participate in pilot projects where they actually tested how they should address, assess and then report on both physical and transition risks in relation to climate change. That has been published in 2018 and it has become the major framework which is now being taken over by various regulators as well as other initiatives as the basis of climate change risk management.
Alain And what’s the driver for the banks to follow the TCFD recommendations, given that they are voluntary, after all?
Milana They are. It’s interesting, there are many organisations – not only banks, it applies to all commercial organisations who are following it, but in the UK the main driver really is regulation. The PRA, our regulator, issued a supervisory statement last year asking the financial institutions which it regulates to put together a plan, how to tackle change. It is centred around the TCFD regulations. The banks were actually asked to put that plan together by the 15th October and they also had to appoint a senior manager in charge of that agenda who is responsible in the organisation. The Bank of England is at the moment in the consultation process of stress-testing the preparedness of financial institutions and they are at the moment talking about the major lenders and insurers to see how they are prepared and obviously they are going to draw conclusions as to how the whole financial system is ready and resilient towards climate change crisis.
Alain And then lastly, would you say as a result of all of that, that climate change is the most prominent aspect of ESG initiative you are seeing?
Milana It definitely is the most prominent in terms of the time and effort banks are dedicating to ESG but it certainly is not the only one and I would that the human rights agenda which derives from the UN guiding principles on business and human rights which is now becoming, sort of, major framework followed by almost all commercial organisations globally, has not gone away. There are still major impacts on human rights by bank’s clients, including supply chains in relation to the lending products which are on the market and the rights-holders whose rights are being impacted are getting increasingly more aware of what their rights are and how they should enforce them.

Welcome to Banking horizons. With insights and commentary from across our global banks group, the series will explore some of the hot topics that we see as being front of mind for our bank clients.

This episode sees Alan Bainbridge, partner and global head of banks, and Milana Chamberlain, partner and head of our ESG practice, discuss the current sustainability trends in the banking sector and what they see as lying ahead.

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