What are ESG leaders at banks/credit unions thinking about as we head into 2022? Everyone is starting to do ESG because the pressure is so great and we will continue to see quite a bit of “Greewashing” (a practice of companies launching adverts, campaigns, products claiming that they are environmentally friendly). For many banks, ESG factors continues to be a reputational risk. But they are progressively taking steps toward a more strategic endorsem*nt of ESG to ensure that that they are well equipped to capture its full potentials. Bank executives (and particularly boards) are starting to ensure that ESG risks are used as vehicles through which all decisions are made, especially in relation to credit and valuation risks in their portfolios, reflecting the strategic nature of these risks. An ESG report will likely become the new normal for banks as this represents an opportunity for a bank to gain visibility particularly among the younger clients. In terms of the smaller banks, no one knows what these are doing in terms of ESG. This is why smaller institutions should systematize ESG communication and reporting in order to position these banks commitment to the planet, the community and its employers.
Questions include: -What are the priorities, and how did you land on those particular priorities?We have been working on de-risking project throughout our professional career, and we believe in responsible capitalism guided by our principals of improving environmental, social, and governance. Therefore, ESG issues are of utmost importance to how we approach any kind advisory service. We have set special working groups that connect global issues, such as climate change, water scarcity, risk management, and human rights, to the organization’s operations, strategy, and risk profile. In so doing at WeEmpower Capital we are able to provide subject matter expertise for third party firms for best ESG practices, rating, and reports. We are the ESG experts in finance with over 15 years of experience in climate resilience, sustainability and impactful technologies. Through these experiences across 15 countries in the EU, the Middle East and the Americas, we have prioritized developing ESG best practices and training that can guide corporations and capital markets move toward sustainable investments many of which in the energy space. Sustainable investing for us looks not only at what profits a company generates but how it generates them. This involves a fundamental shift in how companies are viewed and valued, and we are aware that company’s activities can present risks that may translate into financial costs. Identifying these risks and opportunities means we can seek to calculate their impact-adjusted profits and real potential profitability.
What were your successes in 2021 that give you momentum heading into a new year? Will this be a big thing for you in 2022?As ESG investing accelerates in demand, several key request have emerged from our clients and partners. These demands have ranged from more advisory focused on how to assess climate and social unrest risk, as well as how to develop disclosure and reporting mechanism that are compliant with the new regulations. The coronavirus pandemic, in particular, has generated a lot of requests for our advice as it relates to the interconnectedness of sustainability and the financial system. A line of service we have pioneered and that has grown considerably has been performing stress testing for new investment targets as well as developing ESG comprehensive organizational strategies. Training personnel on the cross-disciplinary of ESG is at the core of what we do and we have had a lot of interest among pension funds and university endowments to develop reporting and disclosure mechanisms that capture the existing and planned ESG impact on their portfolio. Going into 2022, we anticipate a significant increase of our advisory services to asset manager firms, pension funds, university endowments and financial institutions in terms of divesting from carbon intensive industries, as well as portfolio development that are more ESG exposed.
What challenges did you face in 2021 and how did you manage those?Among the top challenges we have faced in 2021, is ESG comprehensive adoption by companies and capital markets, given that according to our assessment, top leadership are not yet fully behind ESG investments. Only 28 % of Fortune 500 companies have fully adopted ESG strategies (PWC 2021). Part of the problem we are seeing is that larger corporation are still struggling quantifying potential ROI as well as balancing ESG with the company strategy and growth targets. Furthermore, in order for capital markets to price ESG risks and opportunities effectively, standardized data and measurements are needed. We’ve seen promising advances made recently in terms of metrics creation, but there is still a lack of high-quality, complete, and comparable ESG data that can be used to assess and price a company’s exposure to ESG risks and opportunities. This is why at WeEmpower Capital we are focusing on creating new methodologies and models, as traditional methods of valuing and pricing assets, which are based on historical data do not suffice in today’s world affected by climate change and social activism. At our firm and in our foundations, we are fostering greater coordination (through thematic roundtables) among ESG market participants to understand the mechanisms by which climate and societal risk drivers interact with the economy, the financial system, and society.
What kind of tangible benefit have you seen (if any) from your ESG efforts — for example, surveys indicate that younger generations are especially focused on the E & S components of ESG. -How important is this among your employees?Everyone in our team and our partner community is a strong believer of ESG as this is the path to least resistance to reducing rapidly societal and financial risk. The survey we analyzed indicates that 88% of high-net-worth millennials considers ESG track record an a critical consideration in their decision about whether to invest in it or not. What we are seeing is more investment activism where younger investors are asking more questions of their wealth managers and are examining their investments to ensure that what they own impacts society and the planet in a positive way. These younger people in the majority of cases are promoting what I call “stakeholder capitalism” where the board rooms are more diverse, they monitor their carbon footprint and they look at resiliency as a corporate value driver rather than a value breaker.
Any tangible/anecdotal impacts you can point to?About 10 years ago we developed ESG strategies for sovereign wealth fund in the Gulf that were never published because were deemed too futuristic and philosophical….these reports are the ones that now gets these clients to call us and demand that we help devise an ESG strategy for their US billion dollar sovereign wealth funds
Does it make sense/is there a benefit to be reaped for being a leader in ESG? Or is it more of a defensive play (reputational risk is in not doing it)?Having worked in ESG for over 20 year across the Middle East, the US and Latin America give us a unique competitive edge as there is great momentum around the societal and climate risk we are all facing. So for us, ESG is the new bottom line, and we are using our global on the ground experience to help government and financial institutions develop measures, standards, benchmarks and disclosure that are realistic and adaptable to the different sectors and regions. We do see however a lot of opportunistic play, ie. New entities and experts serving the wave of this new investment trend. This is good and bad. It is good because it shifts the needle towards a strategically important topic, it is bad because you create disinformation and potentially encourage “corporate greenwashing”.
What are the ongoing challenges and policy obstacles?While many, including myself claim that ESG is the new bottom line, until ESG reporting standards are compulsory, ESG investing will always be part science, part guesswork with all the risk that comes with it. The regulators across different countries are now taking action to change this trend. In Europe the regulators are “close to agreeing to the details of a Europe-wide classification system that will define what qualifies as an environmentally ‘sustainable’ investment.” I expect U.S. regulators to follow the European trends, and it is very encouraging to see the White House, the SEC taking action on devising new framework and benchmarks that will help regulate ESG. As more money lands into ESG strategies, the more the investing community will demand standards.
What are the benefits to ESG coming out of the COP26 climate summit?The summit consolidates good momentums around climate but falls short of the policy actions expected. ESG and the private sector investments are the real winners as they (given the increased policy pressures) will increase the shift towards more climate finance and impact investingas I said in a few of my recent articles on ESG.
