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  • Home
  • About
  • Podcast
    • Summaries
    • Articles
  • Invoice Finance
    • Basics
      • What is Invoice Finance?
      • What is Reverse Factoring?
      • What are Trade Receivables?
      • What is the Cash Conversion Cycle?
      • What is Days Inventory Outstanding?
      • What is Days Sales Outstanding?
      • What is Days Payable Outstanding?
    • Advanced
      • Invoice Validation and Fraud Detection
      • Reasons Why Invoice Finance is Better than a Bank Loan
      • How to Choose the Right Factoring Firm for Your Business
      • A Closer Look at Factoring Agreements
      • What is Trade Receivables Securitisation?
      • Breakdown of the Costs for Factoring
    • Factoring
      • Why Companies Use Invoice Factoring
      • What Companies are Suitable for Invoice Factoring?
      • Factoring and Invoice Discounting
      • How Factoring Works
      • Asset Based Lending
      • Is Factoring Right for Your Company?
      • Accounting for Factoring
      • How a Company Enters into a Factoring Agreement
      • The Costs Involved in Factoring
      • Changing Factoring Company
      • The Relationship Between the Factoring Company and the Debtor
      • Legal Aspects of a Factoring Company Pursuing Payment Through the Courts
      • Factoring in the Construction Industry
    • Fraud
      • Types of Invoice Fraud
      • How to Combat Invoice Fraud
    • E-Invoicing
      • Legal Status of Electronic Invoicing
      • The Benefits of E-Invoicing
      • Implementing an E-Invoice System
      • E-Invoicing Adoption in Mexico and The Rest of the World
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      • Transforming Trade Finance: The Role of AI
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      • UK and US Authorities Intervene in AI Sector
      • Web3 Applications and the Future of Trade Finance
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      • Risk Mitigation for Trade Receivables Securitisation
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      • How are UK Factoring Firms Regulated?
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Home ESG

ESG Risks and Banks

Nick Chiara & John Goodden by Nick Chiara & John Goodden
June 7, 2023
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ESG Risks and Banks
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Download file | Play in new window | Duration: 4:37 | Recorded on November 17, 2022

Banks have not been slow to adopt policies regarding ESG – environment, social and governance factors. It is an acronym whose relevance is hard to deny in the context of climate change and the global struggle for human rights. However, making ESG considerations part of a banks deliberations means more complexity for managers as they look to factor in ESG risks in a way compatible with financial risk management. The challenge is to embed ESG risk into a wider risk framework.

The Paris Climate Protection Agreement (2015) has committed 195 countries to limit global warming to 1.5 degrees Celsius above pre-industrial levels. The United Nations, with this goal in mind, launched their Agenda for Sustainable Development that sets out 17 Sustainable Development Goals (SDGs). 2030 is the year earmarked for implementing these goals. It is also the year climate scientists indicate as the point of no return: if we don’t get to the 1.5 degrees Celsius target by then, irreversible damage will be done to the planet and its inhabitants.

The challenge for banks is to balance the needs of both sustainability and economic growth. People need both a sustainable and healthy environment as well jobs, infrastructure, public services and a flourishing economy.

In the light of this challenge the UN in its Agenda for Sustainable Development has set out a Sustainable Finance Action Plan. The plan seeks to channel capital flows towards sustainable development.

In response several banks and related authorities including the European Central Bank (ECB), the Bank for International Settlements (BIS) and the European Banking Authority (EBA) have begun to set out frameworks to fulfil the brief set for them by the UN’s Sustainable Action Plan.

One of the main problems for banks in Europe and around the world is how to deal with large corporates heavily invested in fossil fuel technology. Banks want to finance the automotive industry; they can’t force them to electrify vehicles but at the same time allowing them to continue on as before is not an option for future sustainability.

While social and governance risks are palpable and can damage society, it is environmental risks that rise to the top of the sustainability agenda due to existential risk. Key to these risks is global warming and climate change.

Extreme weather can damage property, public services and infrastructure. It can diminish or even destroy asset value as, for example, ‘paradise locations’ such as the Maldives disappear under water. Food production is also greatly at risk from extreme weather. Moreover, food production that focuses on factory meat, genetically modified inputs and polluting pesticides face financial nudging to go green. Their traditional business model of making food as cheap as possible has ESG risks – banks will become more and more reluctant to offer financing.

To take stock, banks face regulatory and political pressure to use their unique position to promote sustainability in the markets. Like all of us, they face the disastrous impacts caused by climate change. Banks sitting on their hands face reputational damage. The devastation caused by rising CO2 levels in the atmosphere will lead to asset value loss and economic instability. At the same time, banks offering incentivised financing solutions to meet sustainability targets will cause a backlash from carbon intensive sectors who will see themselves as being unfairly punished considering they are big drivers of economic growth and job creation.

Banks don’t act on noble principles: they act on the basis of profit for their shareholders. Banking systems have been developed over centuries. They don’t rip up rule books out of principle, rather they set up quantifiable metrics, analyse data and alter procedures accordingly. The challenge for banks and ESG rating agencies is to be at the vanguard of qualitative change by using tried and tested quantitative methods.   

Tags: Agenda for Sustainable DevelopmentBank for International Settlementsclimate changeESGESG complianceEuropean Banking AuthorityEuropean Central Banksustainable development goalsSustainable Finance Action PlanThe Paris Agreement
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  • Home
  • About
  • Podcast
    • Summaries
    • Articles
  • Invoice Finance
    • Basics
      • What is Invoice Finance?
      • What is Reverse Factoring?
      • What are Trade Receivables?
      • What is the Cash Conversion Cycle?
      • What is Days Inventory Outstanding?
      • What is Days Sales Outstanding?
      • What is Days Payable Outstanding?
    • Advanced
      • Invoice Validation and Fraud Detection
      • Reasons Why Invoice Finance is Better than a Bank Loan
      • How to Choose the Right Factoring Firm for Your Business
      • A Closer Look at Factoring Agreements
      • What is Trade Receivables Securitisation?
      • Breakdown of the Costs for Factoring
    • Factoring
      • Why Companies Use Invoice Factoring
      • What Companies are Suitable for Invoice Factoring?
      • Factoring and Invoice Discounting
      • How Factoring Works
      • Asset Based Lending
      • Is Factoring Right for Your Company?
      • Accounting for Factoring
      • How a Company Enters into a Factoring Agreement
      • The Costs Involved in Factoring
      • Changing Factoring Company
      • The Relationship Between the Factoring Company and the Debtor
      • Legal Aspects of a Factoring Company Pursuing Payment Through the Courts
      • Factoring in the Construction Industry
    • Fraud
      • Types of Invoice Fraud
      • How to Combat Invoice Fraud
    • E-Invoicing
      • Legal Status of Electronic Invoicing
      • The Benefits of E-Invoicing
      • Implementing an E-Invoice System
      • E-Invoicing Adoption in Mexico and The Rest of the World
  • Brokers
    • UK Brokerage Firms
  • Factoring Firms
    • Europe
      • UK
      • France
      • Germany
      • Italy
      • Spain
      • Holland
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      • USA
      • Canada
    • Australasia
      • Australia
      • New Zealand
  • Hi-Tech
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    • UK Fintech
    • Articles
      • Enhancing Fintech Interoperability: Digitalizing Trade Documents for Efficiency and Security
      • The 7 Types of AI and Their Implications for the Future
      • Transforming Trade Finance: The Role of AI
      • The Different Programming Languages Used in Fintech Companies and Financial Institutions
      • UK and US Authorities Intervene in AI Sector
      • Web3 Applications and the Future of Trade Finance
      • What is Web 3?
      • What Can Fintech do for You?
      • What is Fintech?
      • Tokenisation of Finance
      • Payment Services in the Invoice Finance Sector
      • What is ChatGPT and Why the Fuss?
  • Rating Agencies
  • Securitisation
    • Deal Arrangers
    • Book Runners
    • Articles
      • The Roles of Deal Arrangers and Book Runners in Securitization
      • What is Trade Receivables Securitisation?
      • The Appeal of Trade Receivables Securitisation
      • Risk Mitigation for Trade Receivables Securitisation
  • Legal
    • Law Firms
    • Articles
      • A Guide to Accounts Receivable Purchase Agreements and Invoice Discounting Agreements
      • The Challenges of KYC and AML Checks
      • What is The Model Law on Electronic Transferable Records (MLETR)?
      • Snapshot of Factoring Legal Schemes in England and Wales
      • How are UK Factoring Firms Regulated?
      • What is ISO20022 and Why is it Important?
  • Rates
  • Economy
    • Economic Indicators
    • Articles
      • The Collapse of the Russian Rouble: An Historical Analysis and Current Implications
      • The Current State of the UK Economy
      • Economic Forecast for the UK in 2023
      • Economic News for 2022
      • Financial Crisis or Not?
      • Credit Suisse Bailout
  • Credit Insurers
    • Credit Insurers
    • Articles
      • Credit Insurance Legal Aspects
      • Credit Insurance in Trade Receivables Financing
      • The Benefits of Credit Insurance in Invoice Finance
      • Eligibility Requirements for Capital Relief by Using Credit Insurance
      • What are Export Credits and Country Risk Classifications?
      • How the War in Ukraine Affects the Price of Credit Insurance for Trade Finance
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    • UK Passes Financial Services and Markets Act 2023
    • Latest about the UK Regulatory Proposal for Crypto Assets
    • How will MiCA (Markets in Crypto Assets) Regulation Affect Trade Finance and the Banking System?
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    • Taxonomy of Crypto Assets
    • Crypto Currencies
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    • Interview with Kyriba
    • Interview with Orbian
    • Interview with Crossflow
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