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Report: Benchmarking ESG in banking & finance

October 2021 • A reality check on ESGby Panagiotis Asimakopoulos, Tim Wickenden & Chris Breen

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This report measures the penetration of ESG in different sectors of banking and finance around the world and highlights the challenges ahead for the industry.  While there has been significant growth in ESG activity in the past five years, in most sectors it is still a small fraction of the total.  Europe is a long way ahead in most sectors – but the US and Asia are catching up fast.

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Over the past few years sustainable finance and ESG have climbed to the top of the agenda for policymakers and the financial services industry in Europe and around the world. The public commitment to ESG across the industry has been high, growth in ESG products and activity has been rapid, and the EU has led the world in creating a framework for sustainable finance.

However, consistent and comparable data to measure the level of penetration of ESG in banking, finance and capital markets is relatively elusive. This report aims to provide the first clear and consistent benchmark of the progress so far in sustainable finance and the penetration of ESG across different the industry and between different regions.

For all the noise around ESG, there are relatively few areas of activity where there is clear, measurable and comparable data. In many sectors of banking and finance, ESG is a relatively nascent activity while in some others there is virtually no measurable activity and no consistent data at all. With COP26 just around the corner, this report aims to cut through the noise around ESG and provide an analysis of the penetration of ESG across the industry and in different regions. It highlights the challenges for the banking and finance industry and aims to provide a basis for measuring the growth in activity and in penetration in future at a global and regional level.

To measure penetration we focused on three areas:

  • The industry’s commitment to ESG: we tracked the publicly stated commitment of organisations in different sectors of activity and different regions to different initiatives around ESG.
  • The hard value of ESG activity: we measured the growth in ESG activity and its share of total activity in sectors where there is clear distinction between ESG and non-ESG activity such as investment funds and bond issuance.
  • The level of implementation by the industry: we analysed what the industry actually does. First, we measured capital markets activity of companies actively trying to address ESG issues and of those that are laggards. Second, we analysed ESG scores of the industry and the level at which the industry engages with its clients on ESG such as having a strategy on engaging portfolio companies in climate targets or following specific ESG requirements.

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Our analysis shows that despite high levels of commitment across the industry and significant growth in ESG activity over the past five years, in most of the sectors where ESG activity can be measured it is still a small fraction of the total. Europe is well ahead of the US and Asia on most ESG metrics, but they are catching up fast.

The report probably overstates the overall level of penetration of ESG because in many important sectors (such an bank lending and retail financial services) there is no clear definition of ‘ESG’ and data is not consistent or not available, indicating very low levels of activity.

We used 2020 as our benchmark for consistency, though in many sectors – particularly bond issuance and loan markets – ESG activity has continued to grow this year. The report also identifies the main challenges around ESG in banking and finance such as the lack of information, the disconnect between commitment and implementation, the risk of ESG being ‘hijacked’ by the ‘E in ESG’, and the complexity of different initiatives and approaches by companies and governments across regions and sectors.

While we acknowledge the wider debate on ESG and the wide range of challenges ahead, the purpose of this report is not to analyse whether ESG has intrinsic value or to address the debates on ‘greenwashing’, scepticism over ESG, or a potential regulatory backlash against it. In addition, we do not pretend that this study addresses all issues in measuring penetration or that it provides a perfect solution to the challenges ahead. This study is a ‘beta testing’ work in progress: it aims to provide a benchmark of the penetration of ESG and a basis for measuring growth in the years to come. Any feedback would be most welcome.

Here is a short summary of ‘Benchmarking ESG in banking & finance’:

1) Measuring penetration: over the past few years sustainable finance and ESG has climbed to the top of the agenda for policymakers and the financial services industry around the world. But, for all the noise around ESG there are relatively few areas of activity where there is clear, measurable and comparable data. In many sectors of banking and finance there is relatively nascent activity, while in some others there is virtually no activity or data at all. In this report we measure the penetration of ESG in banking, finance and capital markets by looking at the industry’s commitment, the level of designated ESG financial activity, and the level of implementation by the industry.

2) A strong commitment: the level of public commitment to ESG is high but not universal across the industry. In most of the sectors we analysed more than half of the world’s largest firms are signatories to at least one of the many different ESG initiatives that are relevant to their business. However, the sheer number of initiatives across asset management, banking, pensions, and insurance confuse the picture and perhaps dilutes their impact. The level of commitment varies by sector and region. In addition, these initiatives are much more focused on the ‘E in ESG’ (environment) than the ‘S’ (social) and the ‘G’ (governance).

3) Rapid growth: in the sectors which have clearly designated ESG activity growth has been impressive over the past five years. The value of assets in sustainable investment funds today is almost four times higher than in 2016 and annual flows into these funds have increased 10 times; ESG bond issuance has increased fivefold; ESG corporate bond issuance has quadrupled; and the assets of ESG ETFs are more than fifteen times higher than in 2016. This growth has continued in 2021.

4) A relatively low penetration: while the public commitment to ESG is high across the industry and the growth in ESG activity across most sectors of the industry has been rapid, designated ESG activity still only represents a small proportion of overall activity. In most sectors of capital markets, measurable ESG activity is less than 6% of all activity globally and even in the most advanced markets in Europe it is still only in the low teens in percentage terms. In bond markets ESG accounts for 6% of total issuance, in loan markets 5%, in corporate bond markets and investment funds assets around 4%, and in ETFs assets less than 4%. Given the absence of clear definitions and data in important sectors like bank lending and retail financial services, the overall penetration of ESG across the industry is much lower.

5) A clear lead for Europe: Europe is a global leader and well ahead of other regions in most areas we looked at. A higher proportion of European firms are publicly committed to ESG than their peers around the world, and European firms have a disproportionate weight in the various initiatives than their market share would suggest. In all sectors with designated ESG activity the EU27 represents a higher proportion of total activity than other regions, and in almost all of them it has a larger share of global activity than the size of the overall European market would suggest.

The share of ESG in European debt issuance and in corporate bonds issuance is roughly double the global share, and more than three times higher than in the US and the UK. The share of sustainable investment funds domiciled in the EU27 is nearly three times the global share, more than double that in the UK and 12 times that in the US.

6) From commitment to implementation: our analysis highlights that beyond signing up to an initiative, launching an ESG fund or issuing an ESG bond, implementing ESG into day-to-day business is hard and the industry could do more. While financial companies overall have a similar ESG risk rating as non-financials, there is a much higher proportion of financial firms with medium to high or severe ESG risk rating, particularly among banks and insurers. Financial companies in the EU27 have much lower ESG risk rating than other regions: more than half of them have negligible or low ESG risk. This is a third higher than in the UK, more double the proportion in US, and nearly four times higher than in Asia.

7) A potential disconnect: many firms appear not to be engaging with their clients on ESG and don’t yet comply with some of the specific recommendations in the various initiatives they have signed up to. Only a third of the largest firms globally have a clear engagement strategy for climate reporting and targets with their portfolio companies or customers, and less than half of large firms in Europe do. And while there has been significant growth in the adoption of the recommendations from the Taskforce on Financial Climate-related Disclosures (TCFD) among asset managers and asset owners over the past three years, today fewer than half of the asset managers and asset owners that have signed up to the UNPRI fulfil the TCFD requirements.

8) Mind the gap: ultimately, the growth in ESG activity should translates into more funding for the sort of companies that are actively trying to address environmental and social issues. Capital markets by what we call ‘good ESG’ companies – firms whose primary activity is to address these issues (such as renewable energy firms) represents a tiny fraction of overall activity. And it is dwarfed by activity from ‘bad ESG’ companies, which we define as companies that have a severe ESG risk rating, are on the Climate Action 100+ lists, or active in the oil, gas and mining sectors. In other words, for every dollar raised in capital markets by a wind or solar power company to help address climate change, roughly $10 are raised by the companies that are causing the problem in the first place. This highlights the urgency for the industry and governments to step up on ESG in order to move to a sustainable global economy.

9) Bringing up the rear: in several important sectors of the banking and finance industry there is no clear distinction between ESG and non-ESG activity, data is not comparable or does not exist, or data is limited to anecdotal examples, perhaps indicating complete lack of activity. These sectors include bank lending to companies, equity markets, derivatives, insurance, and retail banking as well as sectors that support the industry such as accounting and law firms.

10) The challenges ahead: perhaps the main finding of this report is that despite the noise and breathless marketing activity, ESG-related markets within banking and finance are in a nascent state and that there are many challenges to overcome. These include: the risk of greenwashing; a potential regulatory and social backlash; the lack of data and information; the complex patchwork of initiatives, standards and frameworks; the different approaches to ESG ratings; the lack of education; and the hijacking of ESG by the ‘E’. Addressing these challenges will enable growth in ESG activity (and for ESG activity to become ‘business as usual’), help create a more sustainable global economy, and help achieve the targets set by governments and companies on climate change.

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