Page 37 - Banking Finance July 2023

ARTICLE

in a manner that is ethical, transparent and reducing their carbon footprint. Additionally, banks can
accountable. incorporate environmental factors into their risk
management frameworks, including stress-testing their
2. Businesses should provide goods and services in a
portfolios for climate-related risks.
manner that is sustainable and safe
3. Businesses should promote the well-being of all
Social Factors
employees, including those in their value chains.
Social factors refer to the impact of a bank's operations on
4. Businesses should respect the interests of and be
society. Banks have a role to play in promoting social equality
responsive to all its stakeholders.
and supporting underserved communities. This can be
5. Businesses should respect and promote human rights.
achieved through responsible lending practices, such as
6. Businesses should respect and make efforts to protect providing affordable credit to low-income households and
and restore the environment. small businesses, and investing in community development
7. Businesses, when engaging in influencing public and projects. Banks can also promote diversity and inclusion
regulatory policy should do so in a manner that is within their own organizations and support initiatives that
responsible and transparent. promote social cohesion.
8. Businesses should promote inclusive growth and
Governance Factors
equitable development.
Governance factors relate to the way in which a bank is
9. Businesses should engage with and provide value to their
managed and governed. Good governance practices are
consumers in a responsible manner.
critical to ensuring a bank's long-term success and
The BRSR report serves as a single comprehensive source sustainability. This includes having robust risk management
of information on non-financial sustainability measures to all frameworks, transparent reporting, and strong board
the relevant key stakeholders of the business, i.e., oversight. Banks that prioritize governance factors are more
shareholders, regulators, investors, and the public at large. likely to have better risk management practices, higher
levels of transparency and accountability, and better
ESG in Banking Sector: alignment with the interests of stakeholders.

ESG is a framework used to assess companies' performance
Impact of ESG on Banking Performance
on environmental, social, and governance issues. ESG factors
ESG considerations have several impacts on the banking
have become increasingly important in the banking sector,
sector. The most notable impact is on the lending and
as banks are under increasing pressure to align their
investment activities of banks. Banks are under increasing
activities with broader societal goals.
pressure to limit their exposure to companies that contribute
to environmental and social damage.
Environmental Factors
Environmental factors are an important consideration for ESG considerations can have a direct impact on a bank's
banks. Climate change and environmental degradation can financial performance. Banks that prioritize ESG factors are
have significant economic and social impacts, and banks are more likely to attract socially responsible investors and
well-placed to play a role in mitigating these risks. Banks
can be exposed to environmental risks in various ways, such
as lending to polluting industries or financing fossil fuel
projects. Therefore, environmental considerations are
becoming more critical in banks' decision-making processes.
Banks are under pressure to limit their exposure to
companies that contribute to environmental damage and
promote sustainable practices.

Banks can support environmentally sustainable investments,
such as renewable energy projects and clean technology, and
provide financing for companies that are committed to

34 | 2023 | JULY | BANKING FINANCE