Financial institutions

Financial institutions around the world are increasingly facing risks due to regulatory and reporting requirements that focus on the environmental, social and governance (ESG) impacts of their operations.

ESG strategy is crucial

There has been new legislation on ESG matters for the financial sector in 2021, including the Sustainable Finance Disclosure Regulation in the European Union and the Executive Order on Climate-Related Financial Risk in the United States.

The ESG performance of companies and financial sector institutions gradually influences investment decision making, lending criteria and insurance considerations. Clearly, companies unable to demonstrate an ESG strategy will jeopardize the long-term viability and resilience of their business.

While there is no definitive list of ESG risks for financial institutions to consider, they typically include a mix of the following.

Environment

Criteria examining an organization’s impact on the planet include:

• Calculation of a company’s total emissions, as a measure of its commitment to fight climate change.
• An entity’s plans for the transition to low-carbon use to ensure energy security.
• Monitoring and reporting of greenhouse gas (GHG) emissions.
• Set targets for pollution and waste practices.
• The projects in which they invest or lend and the impact of these projects.

For financial institutions, the transition to green finance is not only key to an organization’s reputation, but is also emerging as a regulatory requirement globally.

Social

Criteria examining how an organization treats and values ​​its employees and surrounding communities include:

• Labor management policies.
• Health, safety and well-being commitments.
• Impacts that an organization has on the local community and whether these effects are beneficial or negative.
• Labor standards of a company’s suppliers.

These concerns are just a few of many for financial institutions, along with the need to incorporate policies for diversity and inclusion, social equality and customer privacy.

Governance

Governance criteria assess the corporate governance practices of a company. These focus on the structure of the board of directors, in particular the diversity of the board of directors, the quality and transparency of the audit, and compensation issues, such as executive compensation.

ESG risk preparedness varies

Financial institutions currently differ significantly in their preparation for the transition to sustainability, at which point organizational agility to meet new laws, requirements and customer expectations is going to be key.

In a recent Marsh poll, 80% of respondents in the financial services industry ranked climate change and ESG factors as an important or most important issue for their operations.

However, 42% of those surveyed said they have an ineffective process, if any, to identify, respond to and implement changes based on climate threats and ESG factors.

The survey also found that 80% of financial companies had yet to perform a full stress test on the financial impacts of climate threats on their current and future operations.

Conclusion

Organizations that take a more proactive and methodical approach to understanding the impact that ESG factors and climate change will have on their most valuable assets will undoubtedly be able to incorporate higher levels of resilience into their operations. As more attention is paid to ESG concerns globally, the need to act will continue to increase sharply.

Key actions to be taken include:

• Evaluate the implications of ESG for your organization using industry data, risk indices, physical climate models, and the perspectives of key stakeholders.
• Analyze and establish ways to control the physical, transition and reputational risks associated with ESG for your organization.
• Analyze external reporting requirements. Many financial institutions around the world are already aligning with reporting frameworks, such as the Climate-Related Financial Disclosures Working Group (TCFD) and the Global Reporting Initiative (GRI).

By acting on the above, support the execution of ESG objectives in line with an organization’s risk appetite and integrate the practices into established environmental resource management and resilience frameworks.

Development Bank would provide more funds, technical support and training to foster economic growth

Professor Peter Quartey, director of the Institute for Statistical, Social and Economic Research (ISSER), said the National Development Bank (NDG) will complement and strengthen the operations of existing financial institutions.

He said the Development Bank will provide more funds, technical support and training, among others, to help economic growth.

Professor Quartey was speaking at a development dialogue organized by ISSER on the theme: “National Development Banks and Sustainable Finance in Ghana” in Accra.

ISSER chief speaking on “Synergies between the New National Development Bank”, said NDB will deepen financial intermediation, which will propel industry growth, NDB activities and yields.

He said NDB, by applying the wholesale model (EximBank, Agricultural Development Bank (ADB), National Investment Bank (NIB), Fintech), could serve more end customers and cover more sites without incurring high operating costs.

He said the wholesale model proposed by the NDB would foster the growth of private financial intermediaries who become the arms of the NDB, thus reaching underserved sectors and clients.

“The private financial institution that mediates NDB funds will partially absorb some of the NDB’s credit risk,” he said.

However, Professor Quartey said interest rates for end customers may be higher because private financial institutions have passed on their cost of financial intermediation as well as any other margins.

He said the NDB would not provide commercial loans or direct commercial loans to economic actors, but through the NIB, AfDB and Eximbank.

He said development banks, when functioning, would fill the gap in appointing directors to companies, deploying in-house expertise, underwriting and issuing equity, and playing a countercyclical role, supporting corporate levels. global investment and protecting the productive structure of the economy.

The ISSER chief said the Bank would serve as a source of investment funds for the country’s commercial banks and provide advanced medium and long-term financing instruments for specific sectors of the economy, focusing on ’emphasis on agriculture and industrial sectors.

It would also enhance the growth and expansion of many companies by injecting additional capital into the agricultural and industrial sectors through their respective designated banks.

He said the NDB should improve the country’s trade balance by generating more exports and encouraging import substitution, encouraging innovative technologies and improving management skills within the private sector through training.

Professor Quartey said that NDB would certainly provide long-term financing to economic actors and stimulate growth and work closely with Exim Bank, ADB and NIB with mutual benefits for these actors.

He said that with regard to synergies, there would be the intermediation of funds from NDB to end users, absorption of credit risks, provision of equity, technical support, vocational training and financial deepening, financial sector growth and NDB growth.

He said the success of the Development Bank would depend on employing competent managers, operated like a business and free from undue political interference.

“We should strengthen regulation to avoid another cleanup of the financial sector (2000, 2017, 2034?),” He added.

Dr Vera Fiador, senior lecturer at the University Business School, speaking on successful approaches and future national development banks, said there should be a need to look at the market failures that need to be addressed and the best way to go about it.

She said, “We also need to question some of the tested methods that have actually worked for the success of some development banks. “