ESG: The 'E' Crossroads in Banking

"Banking's own contribution to the carbon footprint lies in the energy of its technology and, due to the increasingly diminished network of branches, in all caso, is minimal compared to other sectors"

Banking is always in the spotlight of society, because of its relevance, because of its impact, when its risks or those of its clients surface, when its errors surface and, of course, in Spain it should also be so because of its successes. No matter how bad a reputation banking has after the crisis, the truth is that in Spain we have a much larger financial sector than we should be as a country, efficient like few others and that brings value to the country and its citizens. Their role in the distribution of resources, from agents who have surpluses to those who need funds to finance their homes, or develop their entrepreneurial initiative, etc., is essential for society to prosper.

Let's reflect on the new risk/opportunity situation for banking. It can be a trap crossroads and will be in the crosshairs of society. We'll see if to improve or worsen his reputation.

I mean the already known ESG and in particular to the E (environmental) climate risk. It is not necessary to spend much time explaining the force that this concern represents in society, politics and public opinion in Western countries. The push of recent years is brutal, although we will see if it slows down in the face of the energy situation arising from the war.

There are no diesel mortgages, nor are customer deposits wrapped in plastic. The Banks' own contribution to the carbon footprint lies in the energy of its technology and by the increasingly diminished network of branches, throughout caso, is minimal compared to other sectors.

for banking the challenge of its contribution to minimizing the climate risk of ESG is a factor of business opportunity, risk, responsibility and regulatory compliance. In short, a cocktail that is difficult to mix. Its efficiency depends on society, regulation and is not independent of the strategic attitude that, like any company, banks adopt in this new environment (enthusiastic, skeptical, active or reactive).

  • Opportunity. It is evident that the EU's Keynesian decision to mobilize public and private funds for the energy transition is an opportunity for banking, those who capture it better will have more activity in this transition. But what about the proscribed sectors? Is your funding going to be abandoned? Can it be shown that these sectors are financed to minimize their impact? A hasty abandonment does not seem logical or desirable and banking is already at this point of management under the scrutiny of the markets, public opinion and regulators. The transparency that is required in the reporting, together with the still incipient level of the methodology, and in particular the taxonomy, do not yet allow a good reading of the party in this transitory dimension.
  • Risks. Logically closely related to the above, the bank will also have to manage the change in your credit risk due to the environmental evolution of your portfolio. This is a longer-term dimension because the models used by the banks still do not show signs of an increase in the expected loss due to having a greater environmental impact. Intuitively it seems clear that it will happen, but it is not happening yet.   The crossroads here is making risk decisions ahead of time.
  • Responsibility to society. This situation is not new. The environmental problem does not arise from banking, but banking is going to be essential to channel and control it.  Without a bank committed to this objective, this transition will not be achieved and markets, regulators and society are already demanding this point of responsibility. The same thing is happening that happened with the prevention of money laundering, it is a problem of society, in principle alien to the bank but that, without their collaboration, it is impossible to manage and control. For this reason, this pressure is already visualized, which will surely increase.
  • Compliance. Finally, and derived from all of the above, we have regulatory compliance. In the first place, the reporting compliance aimed at showing the evolution of the carbon footprint itself and avoiding greenwashing, but this is not different or problematic compared to other listed companies. Instead, our prudential supervisor par excellence, the ECB, has taken up the banner of quickly and forcefully demanding an adaptation to this transition. Indeed, much more specific reporting is not only required of banks, but also The ECB demands clarification of its business and transition strategy and, above all, the integration of ESG in risk management governance. The level of integration in this preliminary phase is another of the crossroads to be resolved. The risk of precipitation, without incentives in the capital regulations on green financing, and with the risk that at some point the capital will be penalized, or the holding of a brown-tinted loan portfolio, marks another management uncertainty and, therefore, therefore, another dimension to incorporate into the cocktail at this crossroads.

In short, and in a regulated sector, in each bank, regulatory compliance, as the English say, must be a “must”. We will see how this strategic balance to be carried out in the other three dimensions evolves. As the Anglo-Saxons would say, We will monitor the ROR of ESG (Responsibility, Opportunity and Risks) where the correct timing of its progress will be key to getting it right and being efficient.

Alberto Calles Prieto

 partner responsible for financial regulation services at PwC. Academic Advisor of Fide

Article originally published in the Blog The Confideinitial de Fide

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