ESG stands for environmental, social, and governance. It is a framework for assessing how companies perform in these three areas compared to their competitors. ESG investing is a fast-growing trend that aims to align financial returns with positive social and environmental impacts.
But what do banks really mean when they claim to put trillions of dollars into ESG? Are they truly committed to sustainability, or are they just greenwashing their image?
According to a recent report by Bloomberg, global ESG assets are on track to exceed $53 trillion by 2025, representing more than a third of the $140.5 trillion in projected total assets under management. Many of the world’s biggest banks have published reports chronicling the vast sums they say they are devoting to ESG, ranging from $750 billion to $2.5 trillion.
However, these statements are often vague and inconsistent, leaving investors with little real insight into the very different approaches and definitions of ESG that banks use. For example, some banks include loans to fossil fuel companies that have pledged to reduce their emissions, while others exclude them. Some banks count only the portion of a loan that is directly linked to an ESG project, while others count the entire loan. Some banks include their own operational footprint, such as carbon emissions and diversity, while others focus only on their lending and investing activities.
Moreover, banks face various challenges and complexities in embedding ESG into their operations and systems. They have to deal with a constant flow of new regulations, which bring extensive compliance and horizon scanning challenges. They also have to balance the demands and expectations of various stakeholders, such as customers, employees, shareholders, regulators, and society at large. They have to manage the trade-offs and risks involved in transitioning to a low-carbon economy, while still maintaining profitability and competitiveness.
Therefore, it is important for investors and other stakeholders to look beyond the headline numbers and dig deeper into the details and nuances of how banks are implementing ESG. They should also look for evidence of how ESG is integrated into the banks’ strategies, cultures, and values, and how it is creating value for both the banks and the society.
ESG is not just a buzzword or a marketing tool. It is a vital and evolving aspect of banking that has the potential to shape the future of finance and the world. Banks that embrace ESG and demonstrate their commitment and performance in a transparent and consistent way will be better positioned to succeed in the long term.
