How banks are making ESG integral to strategy, not just compliance

Environmental, social and governance (ESG) was a peripheral corporate social responsibility (CSR) initiative for many financial institutions until the Paris agreement brought it centre stage. ESG started as a compliance exercise with regulators mandating scenario analysis, climate risk stress testing and structured disclosures.

However, ESG is now being strategically integrated by banks as they realise its importance in business performance, regulation, stakeholder trust building and long-term competitiveness. This strategic push entails integrating ESG across the bank whether in deal structuring, lending policies, risk management, performance scorecards or executive accountability.

Sabrina Noiran

Chief sustainable business officer, corporate and institutional banking, Asia Pacific, BNP Paribas

From CSR to a business imperative

Regulators have been fast to recognise the risks of climate change to the banking system. The Basel Committee on Banking Supervision published a voluntary framework for disclosing climate-related financial risks and is encouraging its implementation. Leading jurisdictions have moved from voluntary ESG reporting to reporting mandates. In Europe, banks are reporting on ESG under a comprehensive framework. Asian regulators, especially Hong Kong Monetary Authority (HKMA) and Monetary Authority of Singapore (MAS), have also been in frequent dialogue with banks to strengthen their climate risk management and disclosure transparency.

While regulatory compliance was the initial driver, ESG integration has become a business imperative which brings multiple benefits. Sabrina Noiran, chief sustainable business officer, corporate and institutional banking, Asia Pacific (APAC), BNP Paribas summed it up well: “We've seen a shift in the ESG world from focusing on reducing negative impact to embedding ESG criteria to have positive impact. This could be to catch business opportunities, drive innovation, reduce costs, increase efficiency, attract investors, enhance reputation, or foster long-term resilience and growth.”

Munkhtuya Rentsenbat

CEO, Khan Bank

ESG integration is not limited to global banks; it is also a strategic priority for leading local banks like Khan Bank in Mongolia. CEO Munkhtuya Rentsenbat said, “ESG is not just an add-on, but a core element of our risk management and operational strategy.” ESG principles are now embedded directly into Khan Bank’s credit risk frameworks, lending policies, product design and operations.

Embedding ESG into lending

Financing solutions are a core component of banks’ ESG product suites, with ESG incorporated in different ways across lending strategies. Leading ESG banks operationalise it through green weighting factors, carbon budgets and monitoring along science-based pathways.

Olivier Menard

Head of green and sustainable finance APAC, Natixis CIB

Natixis has been a leader in this area, implementing a colour-based climate scoring system. Olivier Menard, head of green and sustainable finance APAC, Natixis CIB, said, “We have an internal climate scoring system (Green Weighting Factor) that assesses each loan on a seven-point colour scale, from dark green to dark brown.” This system allows Natixis to measure the climate impact of financed entities and analytically adjust risk-weighted assets accordingly.

Assisting clients in their transition journey is a key element of ESG strategies, with banks investing a lot of time and money in this aspect. Menard said, “In addition to the Green Weighting Factor, we are now rolling out a Transition Plan Assessment for our clients.”

Building credibility in a bank’s ESG framework is also key. Martijn Hoogerwerf, head of ING’s sustainable solutions group in APAC, said, "As a core strategy, we monitor our most carbon-intensive sectors against science-based pathways to manage the carbon intensity of our loan portfolio.”

Martijn Hoogerwerf

Head of sustainable solutions group in APAC, ING

Successful integration also requires embedding ESG into decision-making processes. Hoogerwerf said, “In credit approvals, we assess not only risk and return but also how each transaction aligns with science-based methodologies.”

Banks strengthen ESG governance

Banks are walking the talk by embedding ESG into their strategy and putting in place strong governance systems. This includes integrating ESG across products, policies, operations and controls. Banks are building staff capacity in ESG while holding executives accountable by incorporating ESG in performance scorecards.

Kamran Khan

Head of sustainable finance for Asia Pacific, Middle East and Africa, Deutsche Bank

Kamran Khan, head of sustainable finance for Asia Pacific, Middle East and Africa at Deutsche Bank said, “Sustainability has been a central part of our strategy since July 2019. Since then, we have embedded sustainability into products, services, policies and processes in all key areas of the bank, including operations, client engagement and risk management strategy.” The bank has established a detailed net-zero pathway and a carbon budget at a divisional level for its Investment Bank and Corporate Bank. There is also a system in place to calculate emissions associated with potential transactions and identify its possible impact on the bank’s net-zero pathway.

BNP has integrated ESG across the organisation and set up comprehensive governance from the top to the operational level. Noiran said, "We purposely did not create a centre of excellence but instead conducted a systematic exercise to integrate sustainability in our businesses, functions and client lines.” The bank has set up a sustainability academy and created a specialised group to assist clients in their transition.

Noiran added, “There are some pockets where we need advanced expertise, so we created a Low Carbon Transition Group, staffed with bankers who have knowledge of the technologies needed for the transition.”

Mitigating greenwashing risks remains a key priority of ESG governance. While internal audit and independent assurance play a critical role, banks are also putting robust controls in place throughout the deal process as part of their governance focus. Khan said, “We have established business and operational controls to ensure we meet our own sustainable finance standards in originating, structuring and reporting transactions."

Advancing data, systems and ESG technology infrastructure

The challenge of obtaining reliable ESG data, particularly for Scope 3 emissions, is well documented. Added to this is the inconsistency across ESG data providers, which makes choosing the right ESG data solution a tough decision. Banks are addressing this by building their own tools that incorporate data feeds from best-in-class providers.

Khan explained, “We are continually developing our internal systems to obtain sustainability data from different sources and convert it from information to actionable knowledge for business decisions." The bank works with third party data providers, avoiding over-reliance on any single data source and maintaining the flexibility to switch when necessary. Menard’s approach is to also use a combination of external and internal tools. “ In terms of ESG data in our Green Weighting Factor, we plug external data provided by the best ESG data providers into our internal tools,” he stated.

There is increased application of artificial intelligence (AI), machine learning and blockchain technology for ESG. Khan stated, “We review and utilise a vast variety of technologies currently available to support sustainable finance business, but we try to avoid stand-alone technologies.” For him, the key priority is the ability of the technology to work with the bank’s internal systems so it can be mainstreamed into the operational decision-making processes. Menard also envisages technology solving many of the industry’s current challenges. He explained, “AI and technology will further harmonise data and allow for better comparability of ESG data between entities using different methodologies.”

Banks are also leveraging emerging technology to support clients’ ESG journeys. Hoogerwerf explained, “To support our clients in their transition, we developed a platform that leverages AI and publicly available data to assess our wholesale banking clients on their transition plans.” The bank then engaged each client to validate and refine those assessments. In this case, combining technology and client engagement became a win-win scenario for the bank and its clients.

From green to inclusive

While the “E” (environmental) in ESG remains the biggest priority, focus on the “S”, (social) aspect is increasing. This comes in various forms – supporting social use of proceeds financing, incorporating social key performance indicators (KPIs) in sustainability-linked loans, promoting inclusion of the under-represented, or including positive social impact in each financing.

Khan Bank has prioritised financial inclusion, gender equality and small and medium-sized enterprise (SME) development within its ESG strategy. Rentsenbat said, “We actively promote gender-lens investing by offering tailored financial products that enhance women’s entrepreneurship, economic participation and leadership.” On financial inclusion, the bank has fully digitalised its consumer lending products to enable customers to easily access financing. The bank also provides tailored products to SMEs to help them grow sustainably. Rentsenbat added, “We measure success in social impact in terms of financial inclusion, sustainable workplace, SME development and community investment.”

The “S” in ESG also plays a vital role in ING’s sustainability discussions with corporate clients. Hoogerwerf highlighted, “When structuring sustainability-linked loans, social impact is often a key performance indicator. We also support social use-of-proceeds financing.” The social aspect is also a key consideration in all BNP financings. Noiran explained, “As part of the due diligence of any financing, we look at the positive impact it would have on communities.” One of the bank’s KPIs focuses on financial inclusion. “In Asia, we're actively focused on women’s financial inclusion through microfinance institutions,” Noiran said.

Being a leader in ESG

Leading ESG banks demonstrate some common traits: they make ESG central to their strategy and integrate it into their policies and procedures. They operationalise ESG through strong governance, effective systems and measurable outcomes. Recognising that Scope 3 financed emissions are the biggest contributor to bank emissions, the leading institutions have put in place mechanisms to track the carbon intensity of their financed portfolios. These banks support clients on their transition journeys while aligning the carbon intensity of their loan portfolio with science-based pathways.

Data reliability and consistency across data providers remain a challenge. Leading banks are using emerging technologies not only to improve data quality but also to gain deeper understanding into their clients’ ESG journeys. Their mindset—treating ESG as both a competitive advantage and a force for good—offers a valuable lesson for banks still early in their ESG journey.