Adopting ESG to be a game changer for FIs

While complying with ESG norms is mandatory, Indian financial services institutions face several challenges in implementing the norms:

ESG, or environmental, social and governance, norms are about the risks and opportunities that impact an organization’s ability to create longterm value. ESG is also described as the resources of an organization to tackle (a) climate change and resource scarcity, (b) data security and compliance, (c) board diversity, (d) executive pay and tax transparency and (e) societal impacts. Adopting ESG norms by an enterprise indicates good business practices.

The Indian Companies Act 2013 made it mandatory for all business organizations to disclose the amounts they spent on corporate social responsibility, or CSR, from 1 April 2014. And in 2020, SEBI introduced ESG norms that became mandatory for the top 1000 listed firms from the financial year 2022.

Financial institutions are now getting into the forefront in adopting stricter ESG standards. This is mainly because customers are willing to pay more for ecofriendly products and green initiatives in order to increase sustainability. Investors prefer those financial institutions that are ESG compliant; organizations with strong ESG practices are found to achieve higher valuations and risk ratings; and adopting ESG practices into core business activities have been found to create a strong brand and market positioning in the community.

SEBI, RBI INITIATIVES

SEBI’s several measures to promote and streamline investing in ESG theme, thereby allowing for launch of multiple schemes also included a Business Responsibility and Sustainability Report (BRSR) that should be part of their annual reports. This has prompted these companies to raise their ESG scores and comply with this yardstick.

In the banking sector, the transition has been led by the Reserve Bank of India, which in a report titled ‘Climate Risk and Sustainable Finance’, came out with guidelines for banks to assess and manage their ESG risks and ensure that their operations and strategies are in line with ESG principles. The banking representative body IBA has also taken a lead in uniting a group of banks to address ESG-related issues like sustainability and green financing. However, it is a fact that the banking sector in the country is still struggling to implement ESG policies. A CRISIL 2022 report has said a majority of the financial institutions in the country were not tracking their own Scope 3 emissions and banks and financial institutions in the country are yet to align to the BSBR and Net Zero commitments.

BANKS FACE PROBLEMS

At the global level, increasing number of loans are now being restructured to link them to the concerned borrowers’ ESG performance. The ESG-based lending had touched $322 billion globally in 2021, from $6 billion in 2016, which is over 12% of total lending. However, in India a joint study by the RBI and IBA has found that a majority of banks, particularly mid-sized and small ones, are facing several issues on the ESG implementation, right from understanding the definitions applicable to lenders, to the manner in which the ESG norms could be incorporated in the lending decisions.

Yet, there are banks in India, both in the private and public sectors, that are already offering loans in a priority basis to projects related to renewable energy, electric vehicles and battery storage. Axis Bank and HDFC Bank have initiated steps to have an ESG culture. State Bank of India, together with Agence Française de Developpement, had come out with a ‘climate finance loan’ of Euro 100 million.

There is an urgent need to increase green finance flows to emerging market economies. Investment needs for a smooth green transition are large, but actual financial flows to green projects are by and large, concentrated in advanced economies

Shakti Kanta Das, Governor, Reserve Bank of India, speaking at a recent G20 finance event.

BENEFITS FROM ESG PLANS

Many experts are of the view that ESG initiatives bring several benefits to financial institutions, like reduced costs, financial inclusion as a result of social focus, positive stakeholder impact and sustainable economies and value creation.

ESG has an inherent relation with the payments domain. Some of the initiatives in this regard are measures to determine the carbon and social impact of customers’ transactions, APIs to launch green products, carbon offset rewards and loyalty programs for financial transactions and use of ecofriendly materials for payments products.

ESG norms have led to reduction in

costs for banks and financial institutions by including several measures like reduced use of paper, recycling, switching to lowenergy options and using eco-friendly raw materials. Digital payments technologies have cut down the need for paper money. ATMs as well as mobile apps eliminate use of paper. There is increased use of e-messages/SMSs against paper receipts. Digital payment systems have led to less use of labour and thereby cost savings.

Today, Indian banks disclose to the public data relating to diversity, human rights policies and LGBT equality in the workplace.

EXAMPLE OF 4 BANKS

Being the No 1 bank in the country, the State Bank of India has adopted an ESG strategy which is core to its operations. Its policies and operations strictly adhere to the principles of ESG, including climate change risk, renewable energy, BSBR policy, CSR policy and code of ethics. It has a separate Green Bond Framework. It also has a Corporate Centre Sustainability Committee (CCSC) to undertake the execution of the BSBR Policy.

Top private bank HDFC Bank has committed to become carbon neutral by 2031-32. It has made ESG an integral part of its credit assessment process. Assessment of environment and social factors is a part of credit diligence, particularly in project financing above a certain threshold. The bank is also focussed on increasing awareness among its corporate borrowers and understanding where they are in their ESG journey. In the last financial year, the bank has financed 6,110 MW of renewable energy capacity. Some 940 of its branches are green certified. The bank has prioritised its focus on 2 aspects of diversity - Gender and Persons with Disabilities. At present 23% of its staff comprises women.

Likewise, private sector ICICI Bank is also focused on delivering on its ESG agenda through targeted initiatives. The bank has a documented ESG policy and based on this, the bank aims at adopting sustainable business practices that ensure the long-term success of the organization and have a positive impact on the environment and society. The bank has aligned its ESG framework to the UN Sustainable Development Goals (UN SDGs) as well as the long-term developmental goals of building and enabling a dynamic India. One of the key focus areas in this regard is rural transformation. The bank makes various value chain interventions to transform Indian villages into selfsustaining entities. It propagates sustainable usage of natural resources to drive environment conservation. It also deploys responsible financing practices by promoting environment-friendly sectors.

Axis Bank is another leader in adopting ESG norms in its functioning. It has an ESG Committee of the Board, an ESG Steering Committee at the management level to champion ESG across the bank, a DEI Council providing oversight on Diversity, Equity and Inclusion and an ESG Working Group aligning ESG to lending and financing activities. The bank has evolved a Sustainable Financing Framework to guide future ESG-aligned issuances and lending activities. The bank aims at having an incremental financing of `300 billion under Wholesale Banking to sectors with positive social and environmental outcomes by fiscal 2026. The bank also intends to have 30% female representation in workforce by fiscal 2027.

GREEN DEPOSITS

The RBI has stressed on the need for banks and FIs in the country evolving ‘green deposits’. The aim is to ensure that funds are utilized for energy efficiency, clean transportation, climate change adaptation, sustainable water and waste management, green buildings and terrestrial and aquatic biodiversity conservation. In terms of SEBI’s directive, FIs can introduce ESG category of mutual funds. Going forward, there can be scope for tax breaks for lowcarbon technologies and newer policy measures for green financing instruments.

Banks are realizing that when they adopt ESG and digital transformation together, they can achieve progress in both areas simultaneously. While the challenge is substantially huge, there are areas of overlap and those banks which have been able to gain some measure of maturity in both areas will have a very distinct competitive advantage in the market. In this effort, the banks will have to modernize their technology infrastructure and business practices, and at the same time have a different outlook on their people, culture and organizational structure.

Now if you want foreign capital whether it is equity, debt or hybrid, the world will ask us to comply with the global standards. We need to be able to compare different countries across the globe in order to determine their allocation. “It is imperative that emerging markets like India or low-cost economies like India have their own independent view on what ESG means to them.

Madhabi Puri Buch, Chairperson, SEBI, at an ESG Conference for Industry Transformation.