What is ESG and how does it relate to banking and finance?
I have been involved with banking and finance now for over 35 years. During that time, many aspects of banking have changed. We have seen the shift from paper-based operations to highly sophisticated digital banking operations. Channels by which customers can access their funds and make financial transactions have rapidly expanded through the introduction of ATMs, phone banking and internet banking.
However, during most of that time the core purpose of listed banks and companies have not materially changed. The core purpose until fairly recently has been the singular pursuit of profit to maximize shareholder returns through the payment of dividends. That pursuit of profit hasn't always serviced wider society well as has been seen more recently with the Royal Commission into Banking and indeed the global financial crisis of 2008.
However, things are changing and I believe for the better. Stakeholders over the past 10 years have increasingly been expecting more from companies. Stakeholders and specifically institutional investor expectations have changed and the tolerance for environmental, social and corporate governance (ESG) failings has collapsed in recent years. Investors such as superannuation funds and massive institutional investor groups like BlackRock with almost USD5 trillion in assets under management are forcing boards to rapidly rethink their priorities and balance shareholder return in accordance with important ESG criteria.
This demand for change comes from people like us. We are the ultimate investors in mutual funds and superannuation and as our own thinking on the environment and social impact has developed we are now increasingly looking to invest in companies that make profit without compromising our expectations on decent and responsible corporate behaviour. These days many of us have a view about industries such as tobacco, gambling, fossil fuels and weaponry. We are in increased saying we do not want to profit from industries that harm the planet or society. So, we are demanding our investment fund managers to use criteria to help us invest responsibly.
So what exactly is environmental, social and governance or ESG?
Environmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. Environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audit and internal controls and shareholder rights.
This is a massively fast growing sector of the investment market. It is estimated that by 2025 the ESG investment market will exceed USD50 trillion and account for 30% of all assets under management.
As a mutual bank we are by our nature more balanced in our approach. We are not driven by a mission to pay shareholder dividends. Instead we invest our profits to strength our capital and to maximize value add for our member base. We naturally operate a model designed to serve the people who themselves serve and build community.