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How to establish trust around banks’ sustainability practices
In this NextWave Banking in Asia-Pacific podcast episode, we explore the challenge of establishing trust around banks’ sustainability practices and how to manage greenwashing threats.
Sustainability is now higher up on the list of every banks’ strategic priorities investors. Regulators and stakeholders across society are increasingly demanding greater transparency from financial institutions to enable sustainable finance in order to create long-term value.
Join Eric Lim, Chief Sustainability Officer at United Overseas Bank (UOB); and Wolfram Hedrich, Partner, Financial Services Consulting, Ernst & Young Advisory Pte. Ltd., and EY Asia-Pacific Sustainability Leader; with Clare Sporle, Partner, Financial Services, Ernst & Young in part two of this mini-series on sustainability.
Key takeaways:
In this episode, the speakers go deeper into their conversation on:
The role that data is playing in achieving bank's sustainability goals
The importance of building trust and avoiding issues such as greenwashing.
For your convenience, full text transcript of this podcast is also available.
Andrew Gilder
Welcome to the next episode of the EY Nextwave Banking in Asia-Pacific Podcast. As many listeners are well aware, sustainability is now higher up on the list of every bank's strategic priorities. Investors, regulators and stakeholders across society are increasingly demanding greater transparency from financial institutions to enable sustainable finance in order to create long-term value.
For today's episode, I'd like to introduce Claire Sporle, our EY Financial Services Partner based in Sydney, who will be leading today's conversation with two special guests. Over to you, Claire.
Claire Sporle
Thanks for the introduction, Andrew. I'm glad to be part of this episode, which you can listen to in two installments.
Our special guests today are actually seated in Singapore. First, we have Eric Lim, chief Sustainability Officer at United Overseas Bank, or UOB as many in the region will know it. And Wolfram Hedrich, EY Financial Services Risk Management Partner, and our EY Asia-Pacific Sustainability Leader. In part one of this episode, we will explore why banks leaders need to be better at articulating their sustainability vision and what to consider as you establish your governance structures and execute to achieve that vision. In part two, we will go deeper into the role that data is playing in achieving bank's sustainability goals. As well as the importance of building trust and avoiding issues such as greenwashing.
I'm hearing through your comments that one of the ultimate goals perhaps should be for our listeners is to make sure that sustainability is really, truly embedded across the bank's product or services throughout the culture, the systems, the operations. And interestingly, we haven't yet spoken about data. And I think data is one of those topics that always comes up around sustainability. So, would be interested in your views around the role that data has to play in achieving the goals that we've been talking about.
Eric Lim
Data is obviously critical because it's how you baseline the sustainability practices and performance of not only yourself but your borrowers, as well as how you monitor them for the progress. I would say that the data problem, we shouldn't be looking at this as sustainability data. I think what we need to be able to do is actually simplify and clarify what relevant sustainability metrics or data are along sectoral lines because not every industry and every sector needs to be measuring every kind of sustainability data. And I think that's where then the role of the ecosystem between governments setting their national pathways translating into sectoral pathways. That's where the role of regulators being very clear on how they want those sectors to be progressing. And therefore, how they will be measuring that progress.
That regulatory clarity to real economy plays within those individual sectors gives them the confidence to invest and transform and also measure that progress, then linking to FIs like us being able to then have a single language on how to help our clients, both from a financial as well as sustainability perspective. I think that sustainability data lens needs to run along that sectoral lens.
Wolfram Hedrich
Is it sectoral or supply chain?
Lim
So, depending on who your queen bee is. I think sectoral lenses are important, where you do have strong associations or governmental bodies controlling that sector. For example, when you think about power, when you think about real estate, your governments and regulators determine your power strategy, and your real estate standards, right?
Now, if you're thinking about general manufacturing, then yes, I think, Wolfram makes a good point, your supply chain becomes important because you sell across borders to queen bee anchor buyers who may be operating in European or American jurisdictions. They will have different demands and you've got to be able to meet those demands to stay within the supply chain. So, I think Wolfram brings out a very good nuance there.
Hedrich
In terms of data, this is an evolving field. This will get better over time. We're at the beginning. I think one of the key messages there for institutions is don't lock yourself into something that will change anyway over time; remain a certain degree of flexibility in terms of where the data comes from subscriptions to data, and their own data collection efforts. This will change. So, it's not a one-off certain kind of activity.
At the heart of this is the end customers to corporates, in particular, they are not yet set up to provide the kind of data that, ideally, we would want to have. And there's a bit of a question whether we can actually expect them to have that in the end. Maybe the large corporates, they will eventually get there. But is this realistic to expect from everybody to provide sustainability-related data? I think it becomes a bit of an effort and cost challenge as well for smaller entities.
Lim
I think it's a question of time, but sustainability data, emissions data is going to become basic information that enterprises are going to have to provide. So, one of the jokes we always talk about is no company would ever come to a bank and say, "Hey, lend us money. And when we go, can we have your financial statements." We go, "Why would you need our financial statements?" Everybody understands financial statements are the basic financial disclosures you've got to provide to access financing. But that's not the same for sustainability data yet. And I use the word “yet”.
Hedrich
I assess we will change that.
Lim
Exactly.
Hedrich
But how do you see your role in that as the bank in terms of getting your clients to start collecting that data versus regulatory kind of push and kind of industry initiatives?
Lim
We've got to engage in both directions, we got to help our clients understand that the demand for this data is real. And it's not just for banks, it's going to be for their own disclosures to their supply chains, institutional investors and regulators. And we try to help them get on that journey as quickly as possible. But it's also then helping our regulators and various government agencies understand that it's important, particularly for small and medium enterprises, to be targeted in the kind of information we want to get from them, and to support them with as much automation and pre-scraping of publicly available information as possible, rather than have SME customers try to recreate this one by one on their own. It will crush them.
Hedrich
You raised a very important point here. As we all know, SMEs are a major part of the economies here both in terms of GDP contribution and employment in particular, yet most of them are barely starting on the sustainability journey. I think it’s a key question that comes up.
Lim
It's a great question. One of the recent surveys we did, and we do an annual survey especially with SMEs within our portfolio or economies, is we realize that almost 3/4 (77%), if my memory serves, of companies now realize how important sustainability is. And that number has jumped year by year at a very quick pace. So, SMEs understand sustainability is important. The question is what should I be doing? And so, what we try to help SMEs understand is there are low hanging fruits that they can start the sustainability journey on, and they tend to revolve around areas like energy efficiency.
It's around the switch over to more renewable energy sources, as well as big trends like the electrification of the transportation grid, EVs, etc. And so, in service of our smaller customers, we bring together ecosystem plays where we pre-curated the various value chain, suppliers, implementers, importers, companies, and all they have to do is kind of step into this ecosystem. We've already pre-curated for quality and ability to perform the installation of either solar panels, energy efficiency projects, or implementation of charging infrastructure or EV importers.
Hedrich
But it's basically you playing the role of an educator here by providing information. And I would say it's a lot more ...
Lim
Ecosystem building.
Hedrich
And product led. Product led, what I mean is, there is a particular theme, or we're putting solar power on your roofs. This is a product that we finance and provide access to government support, right? So, you become a channel for incentives.
Sporle
The other important stakeholder in the ecosystem that we should touch on is also investors. In terms of a number of our listeners thinking about what are we seeing in terms of how this is starting to come through in trust, and how investment decisions are being made. So, while we are making a lot of strides, and there's a lot more to do around net-zero, we now know that greenwashing is also a real challenge that is impacting those investment decisions and trust in financial institutions. So, Eric, I'd be interested in your perspective around how can trust be established and that greenwashing threat be managed.
Lim
I think, first and foremost, an enterprise needs to be able to step forward and very clearly and transparently articulate what sustainability means for them. And therefore, how that's going to manifest in different parts of the business model, the initiatives, efforts, capability build, etc. Because nobody, including institutional investors or consumers expect the world to be perfect, but they do hold corporates to making the right kind of progress toward a sustainable world or a decarbonized world. So, first and foremost, transparency and clarity of the strategy.
The second thing is then to provide a high-level of transparency and how that progress is coming along. For example, now that we've committed to net-zero, we will need to and want to, on a regular basis, be declaring to our institutional investors or stakeholders how we're progressing on that journey. And this is where it's very important not to sugarcoat. The ride is going to be bumpy; it's going to be challenging. Having the courage to be able to come forward and say, "This is what's working well," and yes, this is due to either the efforts of us and our ecosystem partners, or these are the areas that we find particularly challenging. This is what we're trying to do, and this is the help we need.
Hedrich
But let's be honest, I think the vast majority of greenwashing cases, if there are any, are not because there's the intention or bad intention to mislead investors, but rather the consequences of over-enthusiasm on the part of institutions to tell the story.
Lim
Yeah, Wolfram, I am going to jump in here. My thinking on this has actually evolved slightly. I agree with you. It's not with malicious intent, but it also, from what I've seen, tends to come from someone at a senior level going do something on sustainability.
Hedrich
Correct.
Lim
And then let's talk a lot about what we've done there. As opposed to a more fundamental version of what sustainability truly means for our business and our business strategy. And let's embed that into every part of how we are.
Hedrich
But we are in this phase where now everybody is jumping on the bandwagon if you will. Many countries here in ASEAN have led with taxonomies to establish a sustainable finance market and product development, which has worked reasonably well, I would say. So, there is exactly those discussions right, about we also need to do something around sustainable finance. We need to proclaim a sustainable financial goal. But that runs risks because we can see already some organizations running ahead before they have the controls in place, right? And particularly when we're talking about sustainability-linked loans and bonds, where you link, for example, the interest rate payments to the achievement of certain goals, where the money is used for general corporate purposes.
Do you have everything in place to keep tracking whether those goals are actually achieved and whether they're actually doing what they're supposed to be doing? So, the intended impact. And I would dare say, there are examples out there, where institutions jumped first, come up with a product without having that in place. And that is the risk. So, I do think in the next five to six years, we will see a wave of initial investor activism, and increased cases of greenwashing or alleged greenwashing. So, I think the first risk of transitioning is now reputational and it's something that is not so two years out, but might be four or five, six years out. And so, it's something that institutions need to take it off now.
Sporle
And this is a hard conversation to wrap up, because there is so much to talk about, but I am going to try and get you to wrap it up in my final question, which is, what is the one piece of advice that you would like to give a CEO who's listening to this podcast? We'll start with you, Eric.
Lim
I think CEOs hold a tremendous amount of signaling authority. And what I mean by that is, everybody looks at what the CEO says, what the CEO does to infer what the CEO means. And so, we already talked about the fact that in order for an enterprise to successfully and authentically imbue sustainability into every part of its business model, that signal needs to come from the top. So, I think a CEO needs to be able to (1) work with the senior team to truly embed sustainability into a successful business strategy, (2) to be able to work with the board as well as other stakeholders to share that aligned vision and agree on executing to the aligned vision, and then be able to work with various parts of the FI or corporate in making progress in the most logical bits, and prioritize bits of sustainability work for that particular company in the early days.
And once that alignment and early wins start to come in, the enterprise will begin to educate itself in terms of what sustainability means in terms of knowledge and capability, will gain the confidence to continue on that journey, and have those winds to be able to stay the course through what will be a difficult and bumpy, long-term journey.
Sporle
Wonderful. Wolfram, your advice.
Hedrich
So, my first advice is, if you're not on the road, get on the road as soon as possible. The second thing that I would say, and I quote a sage named Eric Lim here, "Focus on commerciality." I mean, at the end of the day, we shouldn't forget what banks and other financial institutions are here for. They are the grease that makes the economy run, but they also have a commercial role.
And so, if you look at this, at the end of the day, what will be commercially viable will ultimately be the solution that helps us decarbonize. So, it's really focusing on products on the sectors that will be commercially viable, the customers that are on the right transition that will be commercially viable. It's just adding to good business practices, if you will. We're not doing something completely new here. Many of the things that we're discussing, are good, solid banking. It is just that we're now including other dimensions into that decision of what a bankable project, a bankable client is. It's a fundamental role of a financial institution that remains and it needs to be commercially viable in order to function, to work.
Sporle
Wonderful. Thanks so much, Eric and Wolfram, for taking the time to speak with me today and answering the questions I know our listeners will be asking at the moment. And hopefully will now have some inspiration on how to move forward down that bumpy road of trying to align everyone across this complex ecosystem. So, thank you very much.
Hedrich
Thank you, Claire.
Lim
Thanks, Claire.
Sporle
Thank you for listening to Part 2 of this conversation. In case you missed it, please listen to Part 1.
Gilder
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