Pivotal Role Of Technology In Enabling Banks’ ESG Goals
Environmental, social, and governance (ESG) has emerged as a key focus area for companies across all sectors. In fact, among all CEOs globally, 48 per cent identify increasing sustainability as a top priority over the next 2-3 years according to The 2022 edition of CEO Study by the IBM Institute for Business Value. In India, our CEOs were found to most frequently identify regulation and sustainability as their greatest challenges.
As of the end of 2021, 265 banks representing more than 45 per cent of global banking assets had signed up to the UN’s “Principles for Responsible Banking,” that focused on meeting sustainability commitments. This included a greater focus on having companies they invest in examine and reduce their carbon footprint. In 2021, the Securities and Exchange Board of India (SEBI) introduced new ESG obligations and reporting requirements for the top 1,000 listed companies, which includes several banks and financial institutions.
However, a July 2022 study by the RBI found that although banks have begun taking steps in the area of climate risk and sustainable finance, there remains a need for concerted effort and further action in this regard.
Aligning with ESG goals presents certain challenges
The ESG effort for banks extends both in their own operations but also activities that are financed by them. For instance, we are seeing the rise of ‘green financing’, which urges all organizations in the BFSI ecosystem to support sustainable development initiatives that are aligned with the UN Sustainable Development Goals.
Since banks provide capital to industry, they have an opportunity to influence the transition from fossil-fuels to sustainable business practices that embrace renewable fuels. At the same time, banks must account for newer risks created by the increasing severity and frequency of physical climate events, such as flooding or heat waves, which may impact their borrowers’ ability to pay back debt.
Demonstrating inclusiveness in financing is another key ESG goal. For instance, this means ensuring that the profile of borrowers is not limited to large, established conglomerates but also includes smaller players such as MSMEs and small business owners without an established credit history.
Despite the right intentions, Indian banking CEOs face significant challenges in acting on sustainability including lack of insights from data, regulation in addition to unclear ROI and economic benefits.
Technology as an ESG enabler
Banks are looking for opportunities that extend beyond simply responding to regulatory demands and make a real impact on reducing the environmental footprint of their operations. Technology can play a big role in enabling this. Some of the technologies that can impact ESG goals are as follows:
In the long run, the benefits of focusing on ESG goals extend beyond altruism and keeping stakeholders happy. A well-defined ESG strategy can also have a positive impact on the bottom line. In the CEO Study by IBM IBV referred to above, results revealed that 80 per cent of banking and financial management CEOs across the world expect sustainability investments to improve business results in the next five years.
The writing is thus clear on the wall for banks and the larger financial sector — to meet ESG goals, the time to act is now.
The author is Senior Partner & FSS Sector Leader, IBM Consulting, India & South Asia
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