Page 32 - Banking Finance November 2025

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environmentally sustainable projects, such as renewable Challenges in ESG Integration for Lending:
energy initiatives or sustainable infrastructure development. Despite the advantages, implementing ESG criteria into
These loans come with lower interest rates, as banks lending poses obstacles. One of the primary issues is the lack
encourage companies to engage in environmentally of standardized ESG metrics. Different industries and regions
responsible activities. may have varying definitions of what constitutes
“sustainable” or “socially responsible” practices, making it
Social and Governance Factors in Lending: difficult for banks to assess ESG risks uniformly. Moreover,
Social and governance issues are also becoming integral to some businesses may resist the adoption of ESG practices,
lending decisions. Social factors include how companies treat especially if the short-term costs are high.
their employees, the communities they operate in, and their
customers. A company involved in labor disputes, While large corporations are more likely to have robust ESG
discrimination, or unfair business practices may be viewed frameworks, many small and medium-sized enterprises
as a higher risk because such practices can lead to lawsuits, (SMEs) struggle with ESG compliance due to a lack of
regulatory penalties, and reputational damage. resources or awareness. This creates difficulties for banks
when assessing the ESG risks of borrowers.
The Grameen Bank model in Bangladesh demonstrates how
microfinancing can uplift underprivileged communities, Another challenge is the cost of implementing these ESG
creating social value while ensuring financial returns. assessments. Conducting thorough evaluations of a
Similarly, HDFC Bank's Sustainable Livelihood Initiative in company's environmental and social practices requires
India has provided microloans to over 12 million women, additional resources, expertise, and time. Smaller banks or
fostering economic empowerment in rural areas. financial institutions may struggle to incorporate ESG into
their lending decisions due to these costs.
On the governance side, banks assess the quality of a
company’s leadership and corporate governance. Companies Banks in India are increasingly incorporating ESG factors into
with transparent leadership, diverse boards, and strong their lending decisions, driven by regulatory guidance and
shareholder protections are more likely to secure loans, as growing market awareness of sustainability issues. ESG
good governance practices are linked to stability and lower considerations, particularly environmental and social factors,
risk. are becoming critical in determining which companies
receive loans and under what terms.
Global examples, such as Japan’s SoftBank’s struggles with
governance issues in its portfolio companies, highlight the 4. ESG in Investments
importance of robust oversight. In India, SBI prioritizes The investment landscape is undergoing a significant shift
governance, focusing on executive accountability and board as investors increasingly prioritize ESG factors when
diversity to maintain investor confidence.
selecting portfolios. ESG investing, also referred to as
sustainable or responsible investing, takes into account not
only financial returns but also the ethical and societal impact
of investment decisions. This approach aligns investors with
long-term sustainability goals and offers a means to mitigate
risks associated with environmental and social factors.

Environmental Impact on Investment
Strategies:
Environmental factors play an important part in ESG
investment. Investors are more cautious about putting
money into companies that engage in activities harmful to
the environment, such as high levels of carbon emissions or
deforestation. Instead, they are favoring companies that

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