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Reviewing the impact of ESG on business strategies moving forward and preparing for change

The views and opinions expressed in this article are those of the thought leaders as individuals, and are not attributed to CeFPro or any particular organization.

By Markus Lammer, Chief Operating Officer, Ultra High Net Worth Business, Credit Suisse

What, in your view will be the key impact of ESG on business strategies?

ESG has been growing fast over the past few years, and the pandemic – against some expectations – has given ESG solutions another boost. Whether it is the volume of sustainable bond issuance or assets under management with sustainable funds, many of these indicators have reached all-time highs in 2021, in some cases approaching a share of up to 10% of their relevant markets such as in sustainable bonds.

However, the first quarter of 2022 has brought a bit of a cooling off in the market for ESG solutions in some areas, and we need to observe closely what that will mean for future market dynamics and whether these changed dynamics reflect current events tactically — oil prices, war in Ukraine – or whether they are signs of a more strategic shift.

In any case, ESG is and will remain important for banks as they try to serve their clients’ needs, and will require constant adaptation to products, services, and business processes.

How can organizations best prepare for change and inclusion of ESG in day to day management?

We already see a shift in client demand, and frankly also a change in the products banks feel comfortable offering. This has only just begun to really make itself felt, but a recent study by Oliver Wyman predicts that revenue streams of $80-90bn will be at risk in wholesale banking (corporate and investment banking) alone due to greener expectations. That’s a massive amount of revenue at risk, equal to 13-15% of total revenues in the industry – and Oliver Wyman has only identified $15-20bn of new revenue opportunities from the energy transition.

So there is potentially a massive shortfall in revenue as far as we can see today, and it will up to us banks to come up with new products and strategies to adapt to the new client demands and regulations. I think no one has found the perfect solution here, but many ideas are emerging and being pursued – watch the space!

How has ESG changed client demand and expectations?

Conscious clients expect their banks to take ESG seriously and do more than just publish a few glossy brochures. However, to fully live up to these expectations, banks will need to change the way they do business from front to back. It’ll be not just new sustainable investment products and green financing solutions, but banks will also need to rethink their client segmentation, their risk management frameworks, their data collection and architecture, and much else, including their own procurement and sourcing.

We expect the trend towards higher ESG expectations to continue and even accelerate with generational change, driven by millennials who have been showing strong identification with the cause. Various surveys show strong convictions in this cohort:
– 87% believe that business success should be measured in more than just financial performance

– 75% believe that investments can influence climate change
– 75% are willing to pay more for eco-friendly products

What are some key impacts of ESG on client expectations and how can organizations prepare for the change?

Clients expect their banks to help them adapt and to support them with their transition. Banks can help here by providing guidance and advice as much as by helping finance the investments needed for an effective transition to low-carbon activity.

As an example: Credit Suisse has developed a Client Energy Transition Framework (CETF) that helps clients understand where they stand vs their competition with their energy transition. The framework has four levels, from “unaware”, where a company has taken little or no steps towards the energy transition, to “aligned”, meaning a company has already found a business model that is aligned to the Paris agreement.

There are some positive surprises when you look a bit closer at the Client Energy Transition Framework. E.g., even in Oil & Gas, one of the trickier industry segments, only 9% of clients are classified as “unaware”, while a surprisingly high 12% are already “strategic” and have a business that is overall aligned to the Paris agreement.

What do you see as the future of ESG within financial services and how will products have to be adapted to keep up with change?

Clients have started demanding an overall product suite that is aligned to their convictions. For banks, that means two imperatives:
(1) Both investment and financing solutions need to adapt. Banks will need to offer sustainable funds, mandates and investment products to their clients – but at the same time, this needs to be mirrored and balanced with a sufficient supply of sustainable financing solutions that these investment strategies can invest in, including sustainable bonds, loans and structures.

(2) Over time, the expectations towards sustainable products are going up. The first generation of these products tried to “avoid harm”, but current clients expect more, they want to drive sustainable narratives and to generate an impact, to make a difference when they invest. Banks will need to keep adapting to these trends.

A final remark: sustainable investing is still investing and should produce financial returns over the duration for their investors. There is still a separate space for philanthropy where any amounts donated will go directly into furthering a cause, without any expectation of a financial return.

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Melissa will be speaking at Risk Americas 2023 in NYC on May 22-23.