Page 30 - Banking Finance November 2025

ARTICLE

This paper aims to explore how ESG factors are integrated From an investment perspective, Morgan Stanley (2020)
into lending and investment decisions by banks and other showed that sustainable funds perform comparably to or
financial institutions. The focus will be on analyzing the better than traditional funds, with lower volatility.
strategies employed to integrate ESG criteria, evaluating the Morningstar India (2022) confirmed that ESG-focused equity
associated benefits and challenges, and assessing the funds in India outperformed non-ESG funds over three years.
broader implications for the financial industry. In particular, TSC (2019) further demonstrated that strong corporate
we will discuss how ESG considerations influence lending governance correlates with higher investor trust and
practices and investment strategies, and how these stability. Eurosif (2018) noted that thematic ESG
practices are shaping the future of finance. investments, such as renewable energy funds, are gaining
traction across Europe and Asia.
By analyzing the role of ESG in lending and investments, we
hope to highlight why financial institutions need to prioritize Challenges in ESG adoption are well-documented. KPMG
sustainability and ethical governance to ensure long-term (2020) reported that inconsistent ESG data and reporting
profitability and risk management. The paper will also standards limit comparability. OECD (2020) warned of
address the challenges financial institutions face in greenwashing risks that undermine investor confidence.
implementing ESG criteria and discuss the potential future Sustainalytics (2019) emphasized the need for robust
trends in ESG integration. verification mechanisms to ensure authenticity of ESG
claims.
Review of Literature
Future trends suggest deeper integration of technology in
The literature on ESG in finance highlights its increasing
ESG evaluation. PwC (2021) predicted AI and big data
relevance as both a risk management tool and a driver of
analytics would significantly improve ESG risk assessment.
long-term value creation. The World Bank (2020)
emphasized that ESG considerations are essential for Global Sustainable Investment Alliance (2020) forecasted
identifying non-financial risks, particularly in emerging sustained growth in ESG assets under management, driven
economies. Friede, Busch, and Bassen (2015), in their meta- by millennial and institutional investor demand.
analysis of over 2,000 studies, found a positive correlation
between ESG performance and financial returns. MSCI In summary, literature consistently supports ESG’s potential
(2020) reported that high ESG-rated companies generally to align financial performance with sustainability objectives
while acknowledging the pressing need for standardization,
face lower capital costs and reduced regulatory risks.
transparency, and technological advancement to overcome
adoption barriers.
In the Indian context, SEBI’s Business Responsibility and
Sustainability Reporting (BRSR) guidelines (2021) have laid
the groundwork for greater ESG disclosures among listed 2. The Role of ESG in finance :
companies. RBI (2022) identified climate-sensitive sectors as The integration of ESG into financial decision-making has
comprising nearly 25% of Indian banks’ loan portfolios, been the subject of growing research and discussion.
underlining the systemic exposure to environmental risks. According to various studies, ESG is not just a trend but a
Kotsantonis, Pinney, and Serafeim (2016) argued that ESG critical framework that is reshaping the way financial
integration improves decision-making quality by providing a institutions operate. Thus ESG considerations are essential
more comprehensive assessment of risk factors. in identifying risks that traditional financial analysis may
overlook. For instance, environmental risks like climate
The role of ESG in lending is documented in Weber (2014), change or resource scarcity can significantly impact a
who highlighted that banks incorporating environmental and company's long-term value, and social or governance issues
social risks in credit assessments reduce loan defaults and can lead to reputational damage or legal consequences.
improve portfolio quality. Case studies such as the State Bank
of India’s USD 650 million green bond issuance (SBI, 2021) In the context of lending, research shows that banks are
and HDFC Bank’s Sustainable Livelihood Initiative (HDFC, beginning to incorporate ESG risks into their credit
2020) illustrate ESG’s practical application in the Indian assessment processes. A study by the World Bank noted that
banking sector. banks in various regions have started considering

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