How banks can create value through Sustainable Banking Principles

Opinion Piece: 

How banks can create value through Sustainable Banking Principles

 

About the Author:

The author, Woelinam Dogbe, is a Chartered Banker and an International Finance Cooperation (IFC) certified Environmental and Social Risk Management (ESRM) consultant. He has several years of financial services industry experience gained through a distinguished career with top tier financial institutions. Woelinam can be reached via wydogbe@planktonpartners.com

 

In November 2019, the Bank of Ghana launched the Ghana Sustainable Banking Principles (GSBPs). The GSBPs are aimed at ensuring that banks operating in Ghana incorporate environmental and social (E&S) sustainability into their operations. The GSBPs will also get banks to actively contribute to the attainment of the sustainable development goals (SDGs). 

During the launch of the GSBPs, the Governor of the Bank of Ghana served notice that his outfit will mainstream environmental and social risk management (ESRM) into prudential risk assessment of banks.

Undoubtedly, the development is a double-edged sword for banks operating in Ghana. This is because, while the GSBPs place significant responsibilities on banks; it also presents exciting business opportunities to banks. What the banks need to do is to acquire the requisite expertise to be able to identify and unlock the inherent opportunities. 

The GSBPs comprise seven general principles; which are: 

(1) Environmental and Social Risk Management

(2) Environmental, Social and Governance in Banks’ Internal Operations

(3) Corporate Governance and Ethical Standards

(4) Gender Equality

(5) Financial Inclusion

(6) Resource Efficiency, Sustainable Production and Consumption  

(7) Reporting

In order to fully implement the GSBPs, banks would need to design and implement robust Environmental and Social Management Systems (ESMS) that seamlessly integrate into their overall business strategy. 

To successfully do this, banks would need to commit the necessary resources (i.e. human capital, time etc.) to the ESRM agenda. 

An inevitable question that will engage the minds of many bank executives is; how can they ensure that investments in ESRM make financial sense and positively impact the bottom line? 

The good news is, there is compelling evidence which affirms that investments in ESRM payoff if businesses have in place a strong Environmental, Social and Governance (ESG) proposition. A strong ESG proposition enables businesses to identify and harness inherent opportunities. 

In an article published in the November 2019 edition of the McKinsey Quarterly, Witold Henisz, Tim Koller, and Robin Nuttall make the point that, a strong ESG proposition links to value creation in five essential ways. They identified the five key links to be: 

(1) Top-line growth 

(2) Cost reduction

(3) Regulatory and legal interventions

(4) Productivity uplift

(5) Investment and asset optimization

Witold Henisz, Tim Koller, and Robin Nuttall also projected that, in a heavily regulated industry like banking, up to 60% of banks’ EBITDA could be impacted by ESG. 

From the foregoing, it is evident that banks will shoot themselves in the foot if they narrowly look at the GSBPs through the prism of risk management or see them as an inconvenience. 

It is important that banks take a holistic view and see the GSBPs as a value creation vehicle which has the potential to open up new revenue sources.

To derive the full benefits from the GSBPs, banks must not merely rush into putting in place Environmental and Social Management Systems (ESMS). Rather, they must situate the ESMS within a strong ESG proposition. 

What will it take for banks to unlock the inherent opportunities and gain competitive advantage through the GSBPs? It will take a combination of technical know-how and an intimate familiarity with the latest trends in sustainable finance, product innovation, and risk management. It is therefore imperative that banks acquire the requisite competencies and adequately develop the capacity of their teams. 

 

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