Environmental Social Governance (ESG)
Environmental, Social &
Governance (ESG) factors are a set of required level of quality for an
organization that has the power of evoking interest from investors to explore
potential investments. These investments are referred as a responsible, sustainable,
and socially responsible investing. Young generation investors are showing
interest by applying ESG factors as an analysis process for growth
opportunities. As these factors are accelerating in demand, several trends are
emerging i.e., from climate change to social restrictions.
Environmental factor considers
how a company performs in accordance with a practice of preserving the nature
which includes use of energy, preventing waste and pollution, treatment of
animals and conservation of natural resources. This factor is used in
evaluating and managing environmental risks a company may face.
Social Factor considers how a
company manages relationships with employees, customers, suppliers, and the communities.
Investors may look on how company’s employees are treated in respect to their
health, safety & renumeration being an important concern in such global
pandemic? How the demands by its customers for the products/services are been
met? Are the suppliers paid on time?
Does the company contribute a part of its income towards the volunteering
activities such as donations, social awareness, free education, etc.
Governance Factor considers
audits, shareholding rights, executive pay, internal controls in an
organization. Investors may want to know the transparency in a company’s
accounting methods, the voting rights of the shareholders, political
involvement, conflict of interests in the management or any illegal practices.
A recent report by Forbes shows
that more than 80% of the investors are considering ESG factors when making an
investment decision and as on date more than US$ 22 trillion in assets are
being managed under responsible investment strategies globally. This has
resulted in initiatives taken by the regulators to build policies on practices
involving ESG.
One question arises when it
comes to International Trades. With billions of transactions across the globe
and complex supply chain, how can the ESG goals be met?
International trade works as an
engine for economic growth but also counts for 80% of world’s carbon emissions.
Responding to growing concerns on global warming and drastic climate changes,
various companies are now looking ways to mitigate and minimize their impact on
the environment like identifying ESG risks associated by their activities.
In the trade finance industry, many major banks are issuing Green Loans to the businesses and the numbers are counting. Green loan was introduced in the year 2018 in the UK and the purpose of these loans are that the proceeds are utilized for green projects that provide environmental benefits. Following this, other products were also introduced such as:
1. Sustainable supply chain
finance in which suppliers are rewarded for adopting ESG practice into
their supply chain.
2.Sustainable shipment letter
of credit introduced in the year 2014 by the IFC, is similar to the regular
letter of credit which can also be discounted for trade transactions but the
only difference is that SSLC are issued for the specific sustainable purposes.
To qualify for this, the suppliers need to provide evidence of their products
that meets the sustainability criteria which is internationally recognized. It
is usually done in form of sustainability stamp, specific to their industry.
A variety of business clients are
seeking support from their bankers in achieving sustainable practices as their
end users are more concerned on the environmental issues. These practices are
at the leading position for the FMCG and consumer sectors, notably fashion,
lifestyle, food & beverages. In the Energy & Industrial sectors such as
the automotive companies are highly focused in adopting alternative resources
like the purchase of batteries from international markets instead of high emission
systems, Use of imported robotic technology for mining, conversion of coal
generation to biomass for power stations.
Citi Bank has been a leader in such
efforts with embracing ESG factors in promoting businesses worldwide. It is engaged
in sustainable finance solution supporting client’s focus on ESG along with Trade
credit facilities such as suppliers’ credit, working capital and other cost
initiatives wherein thousands of suppliers are receiving finance through Global
supply chain financing platform. It has financed projects such as in renewable
energy which has an output equivalent to power supply to more than 300000 homes
in the USA, US$ 95 billion in green investments. These investments in projects have
saved 4.5 million metric tons of CO2. Last year, the bank arranged the largest
ECA financing deal of GBP 800 million supported by EKF, Danish Export Credit
Agency for Hornsea Project One, world’s largest wind farms located in England. An
assessment by independent auditors on the supplier, their track of goods from
the production to the end user are used to qualify a supplier for preferential
pricing and offering them financial benefit.
HSBC has recently completed its
first sustainability linked trade finance transaction in Hong Kong. The trade
credit facility has been arranged for a multinational garment manufacturing
group known as Epic Group having its activities expanded across the entire
supply chain. The facility will support the group’s trade & working capital
cycle, the pricing is tied to the Group’s performance in intensity in
utilization of freshwater, intensity in greenhouse gas emission, and to review
the supplier’s sustainability using Higg Facility Environmental Module.
The International Chamber of
Commerce (ICC) Banking Commissions Working Group post consultation with its
members as well as selected Executive and National Committee developed the
Customer Due Diligence Guidelines for Sustainable Trade Finance that aims in
identifying high ESG risks associated with goods and services produced by
Bank’s client or within the supply chain. With better understanding of such
risks, it will help banks evaluate responses from its customers, manage credit
risk policies, encourage practices towards sustainability and finance trades.
Maersk, a Danish shipping
company, actively engaged in inland and ocean freight transportation and supply
chain management is one of the largest vessel and shipping line operator in the
world. Maersk in its ESG report has mentioned its commitment towards
sustainability ensuring its business practices are transparent, responsible and
safe in accordance with the principles and core values of UN Global Compact on
human rights, labor rights, environment and anti-corruption. The company has
taken steps towards Decarbonization in which it has achieved reduction in
emission and have set milestones targets. The commitment includes by 2030, it
will deliver 60% reduction in CO2 emissions as compared to 2008 levels, the
discontinuation of transition fuels (such as LNG) and the use of Net zero fuels
and vessels will be implemented.
In India, Aavishkaar
Capital, an investment firm located in Mumbai has launched US$ 250 million ESG
fund in partnership with KfW, Germany’s third largest bank. This fund will be
offered to mid-cap businesses to expand in new markets, with the focus on the
strengthening the ESG practice.
The Securities and Exchange Board
of India (SEBI) on 24th January, 2022 issued a consultation paper to
standardize the ratings of the companies on the metrics of ESG. According to
the market cap, these criteria will be applicable for top 1000 companies. The
consultation paper pointed out “Although the purpose and definition of ESG
rating products offered by different ERPs may be the same, the underlying methodologies
utilized are likely to differ significantly between ERPs without sufficient
disclosures." which may also involve risk of misallocation. As proposed by
SEBI, ESG rating products may be referred to as ESG Financial Risk Ratings or
ESG Corporate Risk ratings.
"Acuite group and ESGRisk.ai
is carefully evaluating the ideas proposed in the consultation paper. The
guidelines when finalized will provide an opportunity to Indian markets to use
India specific rating criteria, models instead of simply relying on ESG rating
reports that are designed for Europe and US’’ said Sankar Chakraborti, CEO,
Acute Ratings.
RBI Deputy Governor said recently
that, “RBI also feels the need to mainstream green finance and plan ways to
incorporate environmental impact on decisions of commercial lending. By
addressing the climate risk, the joint responsibility should be of the
stakeholders as it would affect the capacity to recover quickly from the
difficulties of the financial institution in a long run”.
In the current situation, the
world is fighting the Covid pandemic and its impact on global economy. However,
the pandemic has offered stakeholders to rethink on the operational and
financial strategies and policies that has been adopted an approach that is
environmental sustainable and therefore ESG is definitely an important mean
towards an sustainable economic growth.
References
ESG report Maersk
APMM Sustainability Report
2020, Maersk
https://www.maersk.com/news/articles/2022/01/12/apmm-accelerates-net-zero-emission-targets-to-2040-and-sets-milestone-2030-targets
https://www.cfainstitute.org/en/research/esg-investing
https://www.citivelocity.com/citigps/purposeful-innovation-finance/
https://www.citibank.com/tts/insights/articles/article98.html
https://iccwbo.org/publication/sustainable-trade-criteria-customer-due-diligence-guidelines/
https://www.tradefinanceglobal.com/sustainability/
https://www.rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=20022