Banks and financial institutions are changing their strategy and way of doing business to reflect the increasing impact of ESG on our society, business life and legislation. This trend results in part from a general social trend towards sustainability, with banks already paying attention to ESG – especially its environmental aspects – of their own accord. In addition, banks and financial institutions are also being forced to adjust their strategy by the European Central Bank (ECB) and the European Commission (EC), and this is having a powerful influence on banking strategy and banking activities. The Belgian government has also taken various initiatives to promote sustainability, such as the National Energy and Climate Plan and the National Pact for Strategic Investments.
In the European context, sustainable finance is defined as ‘actions aimed at supporting economic growth while reducing pressure on the environment and taking account of social aspects and good governance guidelines’. Currently, these guidelines are mainly reflected at the ECB through the Climate Stress Test that banks are required to undergo, but at a later stage there will also be the framework surrounding credit tests. As a result, when granting loans, banks no longer take account exclusively of market risk, business risk and credit risk, but also consider ESG parameters.
In concrete terms, three categories have been defined by Europe:
These are criteria intended to limit or exclude any negative impact on certain ESG factors, such as greenhouse gas emissions, controversial weapons, social factors, etc.
This concerns investments in activities that contribute to a measurable environmental or social objective (e.g. access to drinking water, the energy transition, the circular economy, etc.). The companies in which investments are made must also adhere to good governance practices.
This concerns investments in an economic activity that makes a significant contribution to one or more of the six environmental objectives of the EU taxonomy.
However, including ESG criteria in the lending decision-making process can turn out to be a difficult exercise, since they cannot always be evaluated quantitatively. In addition, the international framework on ESG standards is currently very varied and anything but uniform. So far, the focus has mainly been on the environmental aspect of ESG. However, there are now also specific products, such as sustainability loans, that take all three ESG components into account. In practice, emphasis may also be placed in financing projects on achieving carbon neutrality or improving gender neutrality.
It is therefore becoming ever more important for companies to include ESG in their financing applications. As well as increasing their chances of success in obtaining financing, this also makes it possible to obtain more favourable conditions (lower interest rates, for example). As an entrepreneur, it is therefore important to take this fast-changing trend into account when determining growth and strategy. It is clear that businesses, regardless of the scale of their activities, can no longer view ESG as someone else’s concern, or as a separate strategy: they need to build their strategy around ESG.
As stated, measuring these ESG parameters is not always straightforward. Listing and reporting on the key variables and data will therefore become crucial in the long term, requiring the necessary effort to be made and measures taken in good time.