Environmental, social and governance (ESG) policies and banks’ commercial performance, and finds that social issues can represent important opportunities for banks’ existing operations and lines of business. Environmental issues may be another matter. The ESG policies are coming under increased scrutiny among bankers as the cost of such programmes continue to escalate despite often underwhelming results. Arguing unequivocally that banks can deliver both social impact and profits. Financial institutions may have a significant opportunity to expand their business while addressing social issues. In fact, banks can best accelerate social agendas by leveraging their core businesses. Institutions that perform strongly on ESG metrics, particularly in social also generate higher shareholder returns and a lower cost of capital. Yet, while many financial institutions are eager to implement social agendas, they face challenges in measuring value and defining goals. To seize the opportunity, banks should refine their focus on the most impactful issues, create a social agenda role, and seek outside partners.
Significance: Banks typically act on social issues to strengthen their reputation, reinforce the institution’s mission, and align the institution with the priorities of their employees. There are major differences across regions in how banks approach their social agenda, reflecting different socioeconomic conditions and regulatory environments. Despite their ambitions, many banks still struggle with social agendas, including difficulty in measuring value, measuring impact and a lack of defined goals. Focuses on strategic and business rationales that should drive banks to act on social issues.
Dynamics Shape the Social and Climate Agendas: The factors driving action on social topics are different from those propelling climate initiatives. Strengthening a bank’s reputation, reinforcing the institution’s mission, and aligning with the priorities of its employees all core business priorities are drivers of action on the social agenda. For climate action, on the other hand, the primary drivers are external: regulation and risk. Notably, more than half of survey respondents said that financial inclusion as a social goal could simultaneously drive commercial benefits while creating a positive impact. While regulation and risk are not seen as major drivers of social action today, that may change. For example, the European Financial Reporting Advisory Group (EFRAG) is soon expected to require large companies, including financial institutions, to report on the social impact of their activities along the value chain. The European Commission also proposed a new due diligence directive that will require companies to identify negative human rights and environmental issues. In India, regulations require banks to have 40% of their loan portfolio in priority sectors, including small businesses and women entrepreneurs. The growing global scrutiny across bank value chains is leading banks in many countries to broaden the lens through which they drive social impact. Banks have a major opportunity when it comes to social impact. They can not only address critical issues such as financial inclusion, human rights, and the advancement of a just climate transition but also expand their business.
Roles: There are also regional differences in how various business units can shape a just transition. While respondents globally said corporate and investment banking units had the most significant role, Latin American respondents ranked retail and small and mid-sized banking as more important. Most respondents also note that one of the most important elements of success will be breaking down silos to integrate climate and society into one strategy. Prioritising the topics on which banks can act is complex. Depending on the objective, financial inclusion ranked highly in managing risk, driving commercial benefits and creating a positive impact. Data security and privacy topped the list for reducing risk, while responsible selling practices were deemed important for both managing risk and driving commercial benefits.
Grasping the Social Opportunity: Notably, a sound social strategy can deliver real value for banks. As financial institutions develop and refine their strategy, there are several things they should keep in mind: Mounting criticism and regulatory requirements around banks’ records on social issues will require them to focus more on the actions of their clients and their clients’ value chains. The systemic risk of inequality in the financial system will become more apparent, requiring banks to factor it into risk management and address any ingrained biases in their business practices. Efforts to address climate change and deliver social impact will become increasingly intertwined, forcing banks to break down organisational siloes and integrate climate and social strategies. As the demand for socially oriented products grows, banks should embed their social efforts more directly within their core business and ramp up product innovation.
Things to do: To take the lead on social impact, banks should think creatively and consider several actions: Think with head, not heart- Banks must realise they cannot do everything. They should avoid impulse “feel-good” issues and instead zero in on topics where there’s a business case for action and where they can have an impact. Create a social agenda role and hire social experts. While many banks now have a climate chief, they often manage social efforts across multiple departments with little coordination. Banks should identify a head of social impact with strong expertise on social issues, good relationship-building skills and the ability to manage complexity. They may also look outside the industry to hire niche social experts where needed. Think horizontally and break down siloes- Certain social topics may be addressed better through more than one business unit.
For example, while financial inclusion is often thought of in the retail business, the wholesale unit can play a role by financing an intermediary – such as a community development finance institution. Asset management can also invest in startups and solution providers that focus on financial inclusion. Banks should identify where climate and social goals conflict or complement each other and break down siloes between the two to maximise impact in both areas. Think outside the walls on DEI. While many banks still think of DEI as a workforce topic, it is a critical driver of business value. Strong DEI efforts can not only strengthen employee retention, but also build a workforce that better matches the profiles of their users. Collaborate and seek partners. More so than with their climate goals, banks need to collaborate to maximise their social impact. One way is to partner with nongovernmental organisations on financial wellness efforts or with other institutions that are looking for private capital partnerships to scale their own social programmes.
