Page 38 - Banking Finance July 2023

ARTICLE

customers, which can enhance their reputation and improve today, including lack of verification, difference in the
their access to capital. Additionally, banks that have a strong manner in which data is collected by corporations and
ESG focus are better positioned to manage risks associated then subsequently reported. Generally, it creates a lack
with environmental, social, and governance issues, which of faith by investors in quality of that data therefore it
can help to mitigate potential financial losses. By becomes difficult to make investment decisions.
incorporating ESG factors into their lending decisions and
2. Lack of standardization: As a norm, organizations assess
investment strategies, banks can also identify new business environmental and social information in order to put it
opportunities and support sustainable economic growth. into financial audit reports. There is relatively less
reference to standard for reporting, disclosure and
Another impact of ESG on the banking sector is on materiality outside of sustainability reports.
reputation and brand value. Banks with poor ESG
3. Constantly evolving reporting requirements: Due to the
performance may face reputational damage, which can lead
constant changes in political landscape, reporting
to a loss of customers and investors. On the other hand,
framework continues to evolve with the changes in
banks that demonstrate strong ESG performance can
legislations, it becomes difficult for organisations to cope
differentiate themselves from their competitors and attract
up with the changing reporting requirements.
customers and investors.
4. The impacts of ESG measures are difficult to quantify.
While the financial performance of companies can be
Furthermore, ESG considerations can impact banks' risk
measured accurately by defined financial metrics (like
management practices. Environmental risks, such as climate
profits after tax, return on assets/investments), such
change, can have a significant impact on banks' loan
metrics are difficult to be defined for ESG measures. This
portfolios. Banks that are exposed to environmental risks
make it difficult to measure comparative performance
may face losses if they do not manage these risks properly.
of corporates on sustainability measures
Therefore, banks need to incorporate ESG considerations
into their risk management practices to limit their exposure
Conclusion
to environmental and social risks.
The banking sector has an important role to play in
Benefits of ESG Norms: promoting sustainable economic growth and social progress.
By prioritizing ESG considerations, banks can enhance their
(i) ESG reporting norms (like BRSR Guidelines) are likely to
reputation, manage risks, and identify new business
play a bigger role in how companies are assessed, not
opportunities. ESG factors are increasingly becoming a
only by investors but by consumers and stakeholders.
critical consideration for investors and customers, and banks
(ii) The ESG frameworks are heading towards
that fail to incorporate ESG considerations into their
standardisation, which would reduce the scope of
operations may face significant financial and reputational
misrepresentation and greenwashing.Greenwashing is
risks in the long term. As such, it is essential for banks to
the act of giving a false image or giving false information
embrace ESG factors and incorporate them into their
about how an organisation's products are more
decision-making processes to ensure their long-term success
environmentally friendly. It is the practise of making
and sustainability.
unsupported claims about the environmental
friendliness of a company's products in order to mislead Robust ESG framework and responsible ESG investing are
customers. very important for an emerging economy like India as it
provides an opportunity for all stakeholders to build an
(iii) BRSR Guidelines will bring in more transparency in ESG
economy that is financially, socially and environmentally
reporting. This will attract greater investments in
sustainable. SEBI has facilitated the achievement of the
socially-responsible and environmentally-sustainable
United Nations Sustainable Development Goals and the Paris
companies. This will prompt corporates to adopt
Agreement on Climate Change by way of mandatorily
sustainable measures.
requiring ESG reporting by Indian companies.
Challenges with ESG Reporting Norms: Going forward, the ESG norms can be extended in their
1. Methodological data issues: There are major problems scope and applicability to include the unlisted companies as
with the data that is being generated by organizations well.
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