Capitalizing on sustainable finance opportunities in corporate banking
The global regulatory landscape for sustainable finance is rapidly evolving - although it isn't the practice driver, as seen in other finance areas, public pressure is prompting regulators to develop various frameworks, with the UN’s Sustainable Development Goals serving as a blueprint.
Financial institutions face the challenging task of committing to, implementing, and measuring their response to regulations, while supporting their clients to do the same. Key developments include the US SEC's climate-related disclosures, China's ESG guidelines, and Europe's Corporate Sustainability Reporting Directive (CSRD), which emphasizes the dual impact of business activities on the environment and financial health. As global alignment progresses, banks are pressured to adapt and make these changes, as the IFRS Sustainability Disclosure Standards is marking a significant step towards unified reporting standards.
Financial institutions are seizing opportunities in corporate banking by offering sustainability-linked financing and guidance, fostering sustainable practices and innovation across industries. This strategic focus not only drives economic collaborationg and growth, but also supports to achieve long-term success in the transition to net zero.
Unprecedented levels of capital will need to be mobilized over the next few decades to allow the world to transition to net zero. This presents almost unparalleled new opportunities for corporate banks to support their clients as they adapt to change.
This was the starting point for a fascinating session at our recent Finastra Europe Corporate Banking Conference. Experts from across the sector discussed the regulatory landscape driving change across the business world and some of the sustainable finance opportunities for corporate banks as they support their clients to adapt to change and help create a more sustainable future for us all.
An evolving regulatory landscape
Environmental, social and governance (ESG) considerations continue to be a key driver of regulatory change around the world. Staying abreast of all the different regulatory frameworks and unfolding requirements, however, can be challenging. “Regulation would usually drive practice; however, that hasn’t typically been the case for ESG and sustainability, says TradeSun’s Chief Revenue Officer Ian Laverty. “Various stakeholders, particularly the public, have put pressure on businesses to take action. As a result, the regulators have had to play catch up, which is partly why we have a range of different frameworks with which organizations must comply.”
“However, as most regulatory frameworks are based on the UN’s Sustainable Development Goals there is lots of commonality and hopefully we will move towards a common taxonomy across different parts of the world. For now, financial institutions need to focus on how to commit to, implement and measure their response to regulations – and support their clients as they strive to do the same.”
Recent key regulatory developments, including the US Securities and Exchange Commission (SEC) passing its highly anticipated first climate-related disclosures and ESG regulations, and China introducing its first guidelines on business ESG disclosures, have added to those already in place in Europe.
The European Corporate Sustainability Reporting Directive (CSRD), introduced in 2023 and requiring all large EU companies to report regularly on their ESG related information, was seen as a significant development. Europe is very values-driven in regulatory terms. The CSRD is unique because it’s based on the concept of double materiality. Organizations must disclose information on how their business activities affect the planet, as well as how their sustainability goals, measures and risks impact the financial health of the business.
Looking at the wider global picture, there are the IFRS Sustainability Disclosure Standards (IFRS S1 and S2) introduced in 2023. Various jurisdictions, including Singapore, Brazil and South Africa, have already adopted these standards, and the UK is expected to follow suit in July 2024. These standards, which set out specific sustainability-related and climate-related finance disclosures, are a move in the right direction towards a global set of reporting standards for ESG.
Seizing corporate banking opportunities
Aside from meeting their own sustainability commitments, financial institutions of course have an integral part to play in supporting their corporate clients with sustainability-linked financing solutions and guiding them on their sustainable journeys.
By supporting organizations and initiatives that prioritize ESG, sustainable finance is expected to play an increasingly critical role in incentivising sustainable business practices and innovation, providing wider societal and economic benefits, and supporting the transition to net zero.
Anirudha Panse, Managing Director & Head of Trade Finance Product Innovation at First Abu Dhabi Bank, says: “Although many large corporates have a good understanding of sustainable finance, this isn’t necessarily the case for midsize corporates and SMEs. There is a sizeable opportunity for banks to help these clients to develop the necessary awareness regarding what is required of them in terms of sustainability and helping to create a more sustainable economy.”
Mark Azoulay, Partner at McKinsey & Company, says that part of the opportunity for corporate banks is to help deliver the ESG business case: “From initially focusing mainly on compliance, reporting and measuring risk when ESG regulations were first introduced, many banks are now looking at the bigger picture in terms of the ESG ‘business case’. There’s much more emphasis on how to generate growth and revenue from ESG, and this is exciting because it permeates all sectors and client segments.”
There are also many opportunities to generate incremental income growth. Take for example the mortgage market. Given its maturity and price elasticity, a bank’s primary point of differentiation has typically been its interest rate. However, these dynamics are changing as the need for clients to address new regulatory requirements is creating new and additional volumes for banks – for instance, the need for loans to landlords to retrofit current housing stock. These forces are expected to drive incremental growth in the market, and banks need to be strategically ready to capture these opportunities.”
There are considerations on the impact of ESG on the supply chain. Financial institutions are presented with a unique opportunity to work with other organizations to drive investment in green growth and accelerate the transition to net zero.
Collaborating on the path to sustainable finance
Given the rapid pace of change and complexities associated with ESG regulation and sustainable finance, collaboration across the corporate banking sector is seen by many as key to long-term success. As Anirudha says: “Everybody – banks, corporates and regulators – needs to work together on this journey.”
To help facilitate strong relationships across the industry, Finastra’s ESG working group provides a forum for corporate banks to discuss the challenges, opportunities and complexities associated with ESG regulation, the transition to net zero and the role of sustainable finance. Currently consisting of around 15-20 banks, please get in touch if you’d like to join the working group and benefit from collaborative troubleshooting.
