UK Banks Must Expedite Plans to Address ESG Goals or Face Increasing Investor Activism

Economic, social, and environmental factors increasingly govern the manner in which we live and work. In 2017, the World Bank had reported that almost 31 percent of the adult population worldwide were unbanked – these 1.7 billion adults did not have an account at a financial institution or through a mobile money provider. Three years later, the COVID-19 pandemic brought the world to its knees by disrupting lives and livelihoods. It further weakened the vulnerable and the informal sector, bringing a sense of urgency for efforts promoting financial inclusion and resilience.

Linked to at least eight Sustainable Development Goals (SDGs) adopted by the UN General Assembly in 2015, financial inclusion can potentially narrow the socio-economic divide by supporting stable income sources, economic growth, and shared prosperity thus helping alleviate poverty, hunger, and health concerns.

When a year later, the Paris Agreement between 196 parties came into effect, participant countries became bound by a common cause – a climate neutral world by mid-century. This multilateral treaty set off a more unified effort by countries to combat climate change. It also intensified the conversation on the impact of climate change among businesses and individuals.

These developments have a direct bearing on the future of businesses. In March 2022, the European Union (EU) Commission proposed a directive detailing ESG-related due diligence rules for EU and non-EU companies. According to one of its provisions, companies must identify actual or potential adverse human rights and environmental impacts arising in the operations carried out throughout the entire value chain.

Investor activism on the rise

In its report on social impact and sustainability, Boston Consulting Group refers to how some of the largest and most influential institutional investors and asset managers are at the forefront of a powerful movement to add ESG standards to their criteria for capital allocation. Increasingly, they are using ESG parameters to evaluate the companies they own – for instance, how well is their long-term commitment to customers and ecosystems aligned with the core principles of ESG? They also see greater promise of business growth and return on investment in the companies that demonstrate serious commitment to these urgent goals. Closer to home, the number of activist shareholder campaigns targeting UK companies has almost doubled in the past 12 months (reference 2020 – 2021) according to research from Squarewell Partners.

In the light of these goals, urgency of the challenges and investor activism, organisations across industries are revisiting their Environmental, Social, and Governance (ESG) goals.

Converting conversations into actionable goals

The Financial Lives 2020 survey found that 10.7 million adults in the UK had low financial resilience in February 2020 – warning signs that many more adults might find it difficult to cope with a systemic financial shock.

The pandemic situation has only intensified the need for financial resilience in both developed and developing economies. Traditional financial institutions have found it more challenging to continue supporting the impoverished population and micro businesses who depend on their assistance for basic, everyday sustenance. One of the biggest positives to emerge from this grim picture, has been more countries ramping up their digitalisation efforts, particularly towards financial services to address their most pressing needs.

With governments, shareholders, even the general public becoming more aware of these socio-economic imperatives, building financial resilience is the way forward. Sustainable finance has never been more vital. Banks must take on the significant role of bringing these goals closer to reality. They wield considerable influence over the ways in which an organisation or industry builds and executes its commitment to ESG. With this in mind, it becomes the responsibility of banks to closely monitor their reputational risk index and guide their sustainability strategy.

Banks can enable ESG goals in a number of areas including:

Generate wider financial inclusion opportunities

The UN SDG of ‘ending poverty’ by 2030 will become more of a reality with inclusive financing –encouraging financial access to segments of society that have been excluded so far or underserved by traditional banking institutions.

Banks must, therefore, use the opportunity to extend their services to both the unbanked and underbanked population, offer consumer education and empower them both digitally and financially. Doing so can open up the gates for these underserved sections to gainful employment, participation in healthy economic growth, saving schemes, and inclusion in welfare initiatives. An excellent case in point is the Digital Eagles programme by Barclays Bank. Since 2013, it is supporting the transition of the UK’s unbanked population to become digitally literate and confident.

Actively participate in the ESG revolution

Organisations, in fact, entire industries often need a bank’s intervention to raise capital for their operations. This places banks and financial institutions right at the heart of the ESG revolution. With shareholders and investors demanding transparency and disclosure on ESG matters, banks can be pivotal to driving greater visibility and even influencing regulation around several burning issues including gun control measures, penalties on chronic polluters, and support for sustainable businesses. Leading by example is UK firm Britvic which refinanced its £400 million loan facility with several commercial banks through a sustainability-linked deal that offers the company lower rates if they meet their ESG targets.

Be sustainable from the inside out

Despite the challenges, the pandemic has also given banks the opportunity to walk the talk and tread lightly. As remote banking becomes the norm, they can reduce the carbon footprints of their own operations – make everything from lending policies to customer services and support to all internal processes entirely sustainable and cost effective. They can enable socially and environmentally responsible behaviour and processes within their ecosystem by embracing environment-friendly technologies as well as employment policies that promote inclusiveness.

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According to the Financial Lives 2020 survey, the banking sector successfully reduced the number of adults believed to be unbanked from 1.71 million in 2014 to 1.2 million in February 2020. Whether it is through wider financial inclusion, equitable growth or promoting environmentally responsible behaviour, it is undeniable that banking institutions hold the keys to sustainable finance and financial resilience in the future. It is, therefore, imperative that banks embed ESG into their strategies to remain relevant and responsible. N