Sandra Villars, Senior Advisor, published this article on September 29, 2022.
The banking industry has roundly agreed that sustainability needs to become a priority – which means integrating the principles of ESG into core functions. This entails a wide review of processes. So, how much progress has been made in this area, and how much work is still needed? And, perhaps most importantly – what are the biggest challenges still standing in our way?
These are the big questions I was pleased to explore as part of a panel discussion at Africonomie’s recent SASFI event, along with leading sustainable finance experts Nigel Beck, Head of Sustainable Finance & ESG at Rand Merchant Bank; Greg Fyfe, Global Head of Sustainable & Climate Finance at Standard Bank and Arvana Singh, Head of Sustainable Finance Solutions at Nedbank CIB.
One of the key insights to emerge from this discussion is that while sustainability has support at the top level of most organisations, there is still much work to be done; predominantly in the area of rejigging internal processes to ensure alignment with sustainability goals.
At the same time, clients – although mostly eager to accept products that help them address a problem that affects their own business – continue to need some education around sustainability products. Once this takes root, it will be possible to introduce a larger scope of products, including more issuances of sustainable debt. In the meantime, the industry’s efforts are also hobbled by complicated regulations – a challenge which may be overcome by the introduction of an overarching set of guidelines built on consensus around ESG issues.
Sustainability high on the agendas of both product owners and clients
There’s no doubt that the industry is taking this issue seriously: without exception, all banks represented by the panelists are seeing questions of sustainability escalated to Board level. That’s certainly encouraging; more heartening still is the fact that sustainability has been broadly accepted, and more importantly supported, by business unit heads as a necessity. At one bank for instance, the approach to obtaining buy-in has seen the Sustainable Finance team working with other teams to demonstrate how their products resonate with clients and play a role in building long-standing relationships. From the client side, meanwhile, it helps businesses to be presented with an offering that aligns with their own strategies and speaks to a problem they are trying to solve themselves.
While the end goal is important, the road to getting there is more so
Ultimately, though, sustainability has to be less about setting targets and more about putting in place the strategies that will help banks achieve them. For instance, it’s inevitable that internal structures and procedures such as transfer pricing mechanisms will have to evolve. One participating panelist said that this is starting to take place at her bank, as evidenced by its growing preference for green assets over non-green assets. It’s a conversation that speaks to liquidity, she continues; but it’s not just about the inclusion of credible assets on your balance sheet. It also requires tweaking KPIs and the way procedures such as risk assessments are conducted to ensure that the results return desired behaviors from staff. This will undoubtedly become easier as climate risk frameworks develop – we are certain to see more banks moving away from traditional balance incentives like balance sheet growth. Meanwhile, another of the panelists indicated that in order to develop scale, it may be necessary to establish differentiated hurdles for specific clients and specific transactions. It may also be time to start compartmentalizing the balance sheet into green assets, brown assets, and the assets that fall between these two categories, and changing prices accordingly. The same panelist maintained that this is the banking sector’s next phase on the journey to sustainability, and that institutions have already started moving in this direction.
What’s the market’s appetite for sustainable products?
It’s all very well for industry players to agree that it’s time ESG principles are embraced at its core – but what does the market think? Is there an appetite for sustainable products?
Absolutely, say the panelists – although that appetite obviously varies between products. For example, the demand for sustainability bonds and sustainability products is strong: one bank reported that its sustainability-linked loan product has grown quickly because the funds raised can be harnessed for general corporate purposes and are attached to sustainability KPIs and performance targets, which can be directly related to reductions in emissions or water scarcity. In one example, a multi-currency debt package was structured for a corporate client to finance the first phase of its solar PV plant. The entire debt package consisted of sustainability linked and green loan facilities, and the syndication process was largely oversubscribed, attracting lenders which may not have taken up a more vanilla product.
When it comes to green bonds, the industry is still in an education phase. As one panelist said: “We have to take a proactive stance here, describing how a green bond could benefit our clients.” The same can be said for social bonds; a product where take-up has been affected by lack of knowledge.
What about the greenium - the green premium: is this a fact or fallacy?
Are investors really prepared to pay a premium for products just because they’re sustainable – or accept a lower return? The jury is out on that one: in some cases, yes – although this may be because it helps to drive liquidity. One panelist felt that greeniums are an international issue, but at a local level, it depends largely on the timing of issuance: “It would be interesting to see whether the issue persists when there are more issuances, further down the line, but at present there are a number of nuances which impact on whether investors will invest in a green bond instrument – such as whether you are talking about assets already on your book or assets you are seeking to add.”
Another panelist gave the opinion that greeniums are influenced by the market of issuance and the cash position of investors on the day. The best approach? Partner with investors and make sure you understand their needs, and consider creating issuances which are bespoke for the space.
The challenge: Perfecting the balance between regulation and revolution
For all the progress that has been made, it’s clear that a number of obstacles need to be broached before the banking sector can be said to have truly embraced sustainability.
The chief challenge lies in striking the delicate balance between imposing regulation and allowing this growing space to develop – a task that’s characterised by complexity in an area where there is little consensus. It would be helpful to establish a baseline set of ESG imperatives that are both deeply researched and have been tailored to the unique African context – but, until that time, our approach to sustainability is likely to be fragmented, with players' adherence depending on their individual priorities.
Another hurdle is the prevalence of varied opinions which have been included in regulations, resulting in a framework that is, at present, idealistic rather than operational. Moreover, there is often a disconnect between the opinions of an organisation’s group sustainability team and its sustainable finance team; a problem which could be solved by ensuring that both teams are represented during discussions.
The pace of adoption by clients will be our pace-setter
A less workable challenge is presented by clients: the industry's ability to move forward is constrained by the pace at which clients move. The best hope for the industry, then, is that clients accept the need to adopt sustainability at the same pace that banks themselves are doing.