ESG is a big opportunity for the finance sector
Environment, social and governance (ESG) will shape companies over the next decade, likely compelling them to transform their operating models as the world attempts to lower fossil fuel emissions.
The investment will be widespread, representing opportunities for banks and other financial institutions. However, for banks that are ill-prepared or not fully aware, ESG represents a risk and uncertainty.
ESG is part of financial strategy
ESG, as a concept, has been around for a while, but it has recently taken centre stage in developing business strategy.
There are several reasons why:
- The world has increasingly accepted the realities of climate change, fuelled by widespread data collection.
- Social issues have dominated political landscapes in every major economy.
- The COVID-19 pandemic and supply chain crises have heightened the gap between rich and poor in many nations.
A 2021 PwC survey showed that 92% of business leaders in Brazil, India, Germany, the United Kingdom, and the United States believe ESG policies are essential to a company’s survival. That’s not even touching on the number of clients and employees who feel the same, which may be why some 87% of business leaders see ESG performance improvements as a fundamental strategic approach for their companies.
The case of middle-eastern banks
Middle Eastern banks usually lag behind European banks with ESG investments, but the world’s comprehension and investment levels are changing. From 2019 to 2020, banks in the Middle East already saw a 50% increase in issuing sustainable and green bonds.
- The Saudi Electricity Company (SEC) issued the first green Sukuk (Islamic law compliant bond) in international markets from Saudi Arabia.
- The Dubai Financial Market launched the ESG index.
- Egypt sold green bonds valued at $750 million.
- One third of GCC (Gulf Cooperation Council) banks now publish an ESG report highlighting sustainability efforts. This was a significant change from five years ago when none of those banks issued a statement.
GCC banks must adapt
Dubai – an important financial centre in the middle-east. Gulf nations, with their dependence on fossil fuels, face a unique dilemma as ESG grows in importance.
Evolutions and innovations in ESG continue rapidly, but they reiterate the importance of quickly embracing further developments.
Despite their progress, GCC banks are in a complicated situation. For too long, their home nations have relied heavily on fossil fuels – resources the rest of the world aims to ditch within a few decades. Because of this, GGC banks must speed up the pace and intensity of their ESG initiatives.
Government in this region have already diversified their initiatives and investments, but that strategic approach is becoming even more critical. It’s no longer enough to simply understand the ESG initiatives. Banks and the companies they invest in must gain better insights so they can remain relevant and profitable in the future.
Reporting in GCC banks
ESG reporting or a simple knowledge base is not enough anymore.
Now, GCC banks must integrate ESG into their overall investment strategy. Companies and banks are changing their operating models with new strategic approaches designed to make them more sustainable.
As ESG initiatives become increasingly important worldwide, GCC banks will need to take action. They need to maintain that competitive edge as they continue to respond to and stay ahead of stakeholders’ expectations.
It’s as simple a dilemma for banks as it is for any other company: when they become stagnant and unable to evolve, they lose their edge and business.
