In brief

In brief

  • In the wake of the COVID-19 crisis, banks face growing calls to play their part in addressing today’s environmental and social concerns.
  • Those that lead in sustainable finance will strengthen public trust, stay ahead of regulatory expectations and have significant growth opportunities.
  • Most lenders’ risk assessment models and credit teams are not yet ready to make the most of the opportunities of green banking.
  • Forward-thinking banks are acting now to integrate ESG data into their credit risk models and reskill their lending practice employees.


Banking on sustainability

In the world of asset management, investing with environmental, social, and governance (ESG) considerations in mind has become mainstream. Now, impetus is starting to build for sustainable lending as countries around the world redouble their efforts to address climate change and build sustainable economies that work for everyone in the wake of COVID-19.

Yet, even with momentum building behind sustainable finance, banks are taking a cautious stance on the topic. According to BankTrack1, 50 of the 60 banks it analyzed worldwide were classified as laggards in terms of sustainable financing. Their hesitance may be explained by a range of factors, from a lack of regulation and standards to concerns about payback periods, risk assessment and customer maturity.

Sustainable-linked lending skyrocketed from $5 billion in 2017 to $120 billion in 2020.2

The risks of falling behind the curve

Banks’ concerns about green banking are not without merit, yet those that are not proactive may soon find themselves at odds with shareholders and regulators. Subsidiary finance or public incentives are likely to drive significant demand for sustainable lending in years to come. In addition, banking customers are becoming subject to increasingly strict industry-specific regulation such as the EU’s Corporate Sustainability Reporting Directive (CSRD).

Also consider the recent resolution by the European Banking Authority3 that banks in the EU should publish a “green asset ratio” (GAR) from next year. It will let investors easily compare banks by the amount of climate-friendly loans, advances and debt securities on their balance sheet as a proportion of total assets.

Institutions that are unable to cope with these ESG-related regulatory developments will face increased pressure to change. They may see higher credit risks, unfavorable lending terms and weaker profitability as ESG risks become concentrated in their loan books.

But on the flipside, banks that forge a bold sustainable finance agenda will develop the knowledge and skills in their lending practices to thrive in the sustainable lending market of the future. This, in turn, could help them to outperform the sustainability laggards as investors, regulators and customers scrutinize their ESG behavior and credentials more closely in years to come.

The rise of green lending is an inflection point for banking.

A path for reinvention in sustainable lending

ESG impacts the entire lending process and value chain. Banks have made significant investments in straight-through processing, automating document collections, developing e-documentation and reducing collaterals. Moving to green lending carries the risk of falling back on cumbersome manual interventions.

Leading banks will thus include ESG considerations in lending decisions, while building on the investments they have made in automating and speeding up credit processing. They will look at transforming their lending value chains, building ESG data platforms and reskilling lending practice teams.

A strategy for sustainable lending

A strategy for sustainable lending

Green finance remains in its infancy. However, banks that seize the opportunity to finance the sustainability agenda will be able to stay ahead of regulation, capture significant growth opportunities in a new market and strengthen public trust. Read our report to learn more.

Christof Innig

Managing Director – Strategy, Banking Sustainability Lead


Nina Jais

Managing Director – Strategy, Financial Services Sustainability Lead, Europe


Goffredo Amodio

Managing Director – Banking & Capital Markets, Accenture Strategy

MORE ON THIS TOPIC

Purpose: Driving powerful transformation for banks
Top banking CFOs: Agile, digital and strong in ESG
The risks and costs of climate change for banks

Frequently asked questions

Sustainable lending, like sustainable investing, means that environmental, social, and governance (ESG) considerations play a central role in credit decisions. A sustainability-linked loan will typically focus on giving the borrower incentives to meet ESG performance objectives. The conditions of the loan will be tied to the achievement of ESG metrics such as carbon emissions or workforce and board diversity.

In the wake of the COVID-19 health and financial crisis, banks face growing calls to play their part in addressing today’s environmental and social concerns. Some of the forces driving the rise of sustainable lending include:

  • Regulators are focusing on the disclosure of sustainability and ESG policies, including loans to projects and organizations that record high greenhouse gas emissions.
  • Investors are scrutinizing how banks are addressing issues such as climate change and diversity, including how their loan books take into account ESG considerations.
  • Customers are looking to banks to do the right things.
  • Growing credit risks—sustainable lending laggards may face an increase in credit risks and a decline in profitability as ESG risks become concentrated in their loan books.
  • Leading banks see this as an opportunity to strengthen public trust.
  • Green mortgages offer houseowners a discount on the mortgage rate if the house meets specific energy standards.
  • Sustainability-linked loans or revolving credit facilities give borrowers discounted interest rates for achieving ESG goals or benchmarks.
  • Green loans promote a greener economy, facilitating investments in renewable energy, green buildings and sustainable farming.
  • Sustainability-linked supply chain finance gives suppliers preferential rates if they meet sustainability-linked metrics.
  • Green loans securitization—asset-backed security with proceeds raised to finance loans for green infrastructure.

A medium-term ESG roadmap might focus on these steps:

  • Banks may adjust credit products, policies and processes to reflect ESG principles. Product specifications, documentation and collaterals or covenants will need to be adapted, while lending committees will consider ESG information and profiles in lending decisions.
  • Relationship managers will need to be equipped with training and industry knowledge so they can make financial decisions based on both ESG and industry considerations.
  • Leading banks will build on their progress in automating and speeding up credit processing. They will embed the same digital standards used in the rest of the lending business into sustainable lending operations.

Many banks’ credit professionals have not been trained to assess lending terms and conditions through the lens of sustainability, nor do they have skills in analyzing ESG data. We suggest three actions to consider:

  • Banks could offer standardized, continuous and modular training, comprising a mixture of interactive in-person and online sessions. With a modular approach, banks can train all team members to the same baseline of knowledge, while offering specialist modules for different roles.
  • Allowing employees to earn badges or certifications for completing modules will make it easy for leaders and colleagues to track who has been trained and in which topics.
  • An ESG forum or committee can be established to formalize the sharing of lessons learned and best practices.

We recommend these possible steps:

  • Banks can select third-party ESG score methodologies for assessing listed companies, or develop their own ESG methodology and certify it with an independent institution. They could also blend these approaches.
  • For unlisted companies and those not rated by independent agencies, banks can gather ESG information during interviews or via online questionnaires.
  • To facilitate accessing, validating and managing internal and externally sourced ESG data, banks can establish an ESG central data utility. This structure will take care of data management, definition of data policies and data frameworks, and running ESG data operations.

References

1. Banks and Fossil Fuel Financing, BankTrack, 2021.

2. Environmental, Social, And Governance: How Sustainability-Linked Debt Has Become A New Asset Class, S&P Global Ratings, 2021.

3. EBA advises the Commission on KPIs for transparency on institutions’ environmentally sustainable activities, including a green asset ratio, European Banking Authority, 2021.

Subscription Center
Stay in the know with our newsletter Stay in the know with our newsletter