ESG - Don’t make it a hollow marketing term

ESG is a hype in many industries and the financial sector is no exception to that. But due to this hype, it also becomes difficult to understand what is exactly meant with ESG. Today it has become such a marketing buzz-word that any activity not directly related to making profit is put under the denominator of ESG. Time for a small recap therefore.

ESG stands for Environmental, Social & Governance, which roughly means that any company should look for a balance between good financial results, transparency, social interests and the environment. It is derived from the "Triple Bottom Line" movement, also called PPP (People, Planet and Profits), which aims to push companies to optimize for all 3 P’s and not just the P of "Profit".

When looking more specifically to ESG, we can break it down in the 3 letters:

• Environmental: this includes aspects like:

  • Waste reduction through reducing and reusing waste and recycling (e.g. sustainable packaging)

  • Energy reduction via energy efficiency, better isolation, less heating…​

  • Greenhouse gas emission reduction or also called Carbon footprint/emission reduction or decarbonizing. Many companies even have the ambition to become carbon-neutral, meaning they try to limit their carbon emissions as much as possible and at the same time offset their remaining carbon emissions (carbon compensation) via investments in foresting and other decarbonization projects.

  • Making use of products, which are local, ecological and more natural (i.e. less processed). E.g. for the company restaurant using local food, which is maximum plant-based.

Important here is to avoid Green-washing, i.e. promoting the company as a green-company and pumping up the figures on environmental efforts, while in reality this is pure branding, still aiming to increase the "Profit" part of the 3 P’s.
Additionally with Global warming being so present in the media, there is a tendency to a carbon tunnel vision. Clearly greenhouse gas emission reduction is important, but environmental effort are so much more, like reducing waste in general, increasing (or at least stopping the reduction of) bio-diversity, decreasing light and noise pollution…​

• Social: this includes aspects like

  • Guaranteeing the safety and health of all employees, customers and the community surrounding the company and this both for the company itself as for any suppliers the company is working with. This includes extreme cases, like banishing illegal child labor or even "slave labor" (like working with illegal immigrants which are paid less than the minimum salaries and of which passports are confiscated), all the way to adherence to workplace health and safety, such as reducing stress and burn-out, implementing ergonomical measures…​

  • Inclusiveness in the organisation, i.e. ensuring the organisation is respectful for everyone and that there is an equal opportunity policy. This includes measures like supporting the LGBTQ+ community, gender equality, avoiding any discrimination on race or any other characteristic (like age, gender, origin, disabilities…​)…​
    The goal should be to become a diverse organisation on all levels(i.e. all the way to C-level and board room - the all-white men over 50-year board rooms are still more a rule than an exception in the Western world). This means actions need to be taken in every process of the organisation, e.g. from advertisement and marketing (making the brand more inclusive, e.g. via images which are more diverse, via gender-neutral language…​), to recruitment up to the general culture of the company (e.g. making working hours easier to combine with family live, providing certain facilities to religious practices…​)

  • Charity spending, i.e. a company should give back to the community it is active in. This goes from financial charity donations to donations in-natura (e.g. giving away unsold inventories instead of destroying them)

  • A respectful way of working with employees and communities, e.g. avoid hire-and-fire practices, avoiding continuous moving of activities to the lowest-cost country (e.g. outsourcing, moving manufacturing to low-cost countries…​), but also small things like a good community dialogue to resolve issues like traffic problems, noise, smell…​ coming from the company.

  • Transparency and correct service to the customers, i.e. avoid untransparent cost structures, avoid luring customers into services they don’t really need or into contracts they can’t get out of, avoid misleading sales communication, avoid lock-in of customers (e.g. by locking in data, which can’t be ported), ensure correct customer support for existing customers (not just a good support for onboarding prospects)…​

• Governance: this includes aspects like

  • A salary of the company directors and board members which is in a correct relation with the other employees of the company

  • Transparency of the structure of the organisation, i.e. avoid complex structures of holdings, subsidiaries…​, which make the financial reporting very untransparent and complex to understand

  • Correct payment of taxes, i.e. do not exploit all kind of loop-holes to avoid paying taxes (like off-shore tax heavens and other difficult and untransparent fiscal structures), but also the misuse and abuse of government resources (like subsidies). In general any method to avoid that resources that would normally go to the government and thus flow back to the community is to be avoided. Obviously this is not a black-white-story, as it’s also the job of every CFO to efficiently deploy all financial means and optimize taxes, but this should stay within reasonable and ethical levels.

  • Actively fight against a culture to bribery and general misconduct. This means that the company should put in place processes and structures to allow for whistle-blowers to be heard, to file complaints even against the highest leadership of the company and ensure those get fairly treated, ensure that ethical principles are taken into account in every decision…​

Most of the above actions and examples are applicable to any industry including the financial services industry, but the financial services industry has also a number of initiatives, which are very specific to the industry, e.g.

• SRI investing (Socially Responsible investing): a bank or insurance company does not only invest its own money, but also invests (and advices on investments) money of its customers. If all financial service companies invest this money in companies with a certain SRI level, this can make a huge difference. This should be realized by properly informing customers of the SRI initiatives and issues and SRI level of each company behind the securities the customer can invest in. Additionally the bank or insurer should ban the securities linked to companies which are not at all respecting SRI guidelines and foresee sufficient funds, which only invest in companies adhering to the highest ESG standards, for customers to invest in. See my blog "Innovation is the key to solve our climate issues (part 2) - The financial services sector as change enabler" (https://bankloch.blogspot.com/2020/08/innovation-is-key-to-solve-our-climate_30.html) for more info.

• Provide PFM/BFM apps, which can analyse the spending of the customers, give an indication of the customer’s carbon footprint and recommend more ecological alternatives. This can help customers to be more aware of the impact of their consumption and take corrective actions to improve it.

• State-of-the-art AML (anti-money laundering) technology and processes: often AML is seen as a compliance and administrative task imposed by governments and as a burden. However if this is done well, the positive impact on society can be enormous. Criminal organisations only exist as long as they make a lot of money and that the people behind those organisations can also spend this money. If banks can succeed to properly identify and block those criminal money flows, this can have enormous positive impacts on society as a whole. Behind every euro of criminal money that is blocked, there are stories behind like illegal prostitution, child abuse, drugs, crime…​

• Investments in cyber-security and fraud handling, i.e. deploy best-in-class techniques to protect people’s money via good security measures (like 2FA authentication, risk-based authentication…​), educating customers of security risks, applying automatic fraud identification and automatically blocking transactions which seem suspicious, help customers to avoid initiating wrong payments (e.g. via warning or hold queues for large-payment amounts, checking if the IBAN is matching with the name of creditor, allowing customers to easily report fraudulous cases and use this info immediately as warnings to other customers…​), collaborating with the police in mapping out fraudulent money flows and providing all info to identify the criminals behind it…​

• Financial inclusion (see my blog "Financial inclusion - A word with many meanings" - https://bankloch.blogspot.com/2020/02/financial-inclusion-word-with-many.html), which foresees to offer access to all financial services at a reasonable cost to everyone. Many people in the world are still unbanked, while others are underbanked, as the services offered by banks are too expensive for them to profit from. Offering a simple access to good financial services at a reasonable cost can have enormous positive implications on society as a whole.

• Financial education: the financial services industry has a responsibility to properly educate people about finance. An alarmingly high percentage of people lack even the basic knowledge of financial aspects (like interest, inflation, risk…​), resulting often in bad financial decisions (e.g. taking on too much debt, investing money in risky assets which they actually needed or not diversifying investments). This should be done by communication campaigns, UI/UX features (like templates, warning, small videos, tips and tricks popping up…​) in the banking app, but also by gamification, access to tutorials (which are easily readable), access to financial advisors or via specific banking products (e.g. think of the new banks like Henri or Rise offering specific services for young people to get familiar with financial services).

• Ethical credit management, i.e. avoiding pushing people into unnecessary debt (e.g. by avoiding aggressive marketing on credit products, properly assessing people’s ability to repay the credit and avoiding the usage of credits for questionable purposes, like e.g. holiday credits or usage of BNPL for food), assist people to take the right credit product for their situation (and not the most profitable for the bank), allow customers to receive credit without a credit history (using alternative scoring techniques) and allow a flexible management of ongoing credits (like e.g. increase or decrease duration of the credit, possibility to overpay / underpay the monthly reimbursement (obviously within limits) or allow to temporarily pause reimbursements.

• Reduce any friction related to payments: any costs or frictions associated to payments can have negative impacts on society, e.g. no access to cash can be an issue for people less familiar with electronic payments, high commissions on remissions of immigrants sending money back to their home country (remissions is the biggest source of support to developing countries, meaning any commission on those has a huge impact on those countries), costs associated to payments are indirectly included in the price of goods…​

• Specific actions in the financial industry, e.g. initiatives like "True-Name" card for transgender/non-binary persons and Touch Card which is a card for the visually impaired persons (via small distinctive element on card, people can feel if their card is a debit, credit or pre-paid card)

• …​

Today ESG is a must-have for every company to take seriously. Not only because it’s the right thing to do, but also because it’s essential for the survival of a business. E.g. 93% of Europeans think Global Warming is the top point to tackle in the world, meaning any company not taking this serious will be losing a significant percentage of its customers sooner or later.
However it’s still difficult to convince mainstream companies, customers and employees to take the right steps. Therefore the concept of convenient sustainability is critical, i.e. making the sustainable solution at least as convenient (both in user experience and price) and preferably more convenient for the end user than current solution. This can be achieved via innovative technology, excellent user journeys and by governments providing incentives to ESG companies. This combined with a mental-shift will result in progress.