What Is ESG Banking? Definition, Importance & Ethical Finance

When banks first emerged, we thought of them simply as necessary financial institutions to store our money. But over time banks have become more integrated into our lives, to the point that the banking industry is now more influenced by, and perhaps attentive to, consumers.

For a while - and still today - a big factor in our service choice is whether a bank charges monthly fees or not. Those that don’t have become entirely digital banks, removing the need for traditional bank tellers and the physical aspects of a banking relationship. But as more people, and investors, are aware of ESG and encourage the practice, the banking sector is adapting well beyond providing a seamless digital experience.

Whether the banks are well established or newly emerged, ESG banking is the next iteration of service provision. This is because banks play a crucial role in ensuring corporate social responsibility as well as helping the world make the systemic transition to sustainability.

What Is ESG Banking?

Ultimately, ESG banking is similar to the ESG investing philosophy. It is conducting business in the same manner, with the only difference being factoring non-financial elements into the decision-making process. How this looks in banking is a bit different than when investing in the stock market, since banks are more ‘enablers’ rather than direct ‘causers’. Here is how it’s broken down:

• Environmental (E): At its core, E considers factors such as carbon emissions, climate change, renewable energy, conservation efforts, and resource management. But while banks aren’t directly impacting these things, they do enable them in some fashion. Ultimately, banks adopting solid ESG policies would be leaning towards projects that have good sustainability practices in place, and are looking to conserve or regenerate and revitalise environments.
• Social (S): In a 2018 article, the New York Times noted that 8 out of 13 mass shootings with over 10 people killed were financed through credit cards - a product that is issued by banks. Since then, there have been many more mass shootings with no doubt many being supported by credit cards. This is a growing concern, especially in the case of America, but that is just one example of a social problem banks are faced with. They not only consider their employees, but the communities they are in, their clients, and society at large. It covers diversity issues, inclusion policies, labour practices, customer protection, and many more.
• Governance (G): Governance refers to the internal management and oversight of a bank. This looks at how a bank's leadership structure looks like, how transparent it is, as well as their ethical behaviour, compliance to regulations and general accountability. Good governance ensures that a bank operates in a responsible and sustainable manner, minimising ESG risks and promoting long-term value with positive impact.

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Why Is This Important For Banks?

Ultimately it comes down to meeting customer demand. Business at its core doesn’t have a political alignment and the goal is to cast as wide of a net as possible. In some cases this can lead to greenwashing, but when seriously implemented, companies reap more benefits while helping the planet and people in it.

As ESG becomes more important, and more normalised to people, the biggest criterion for new customers to consider from banks is how much good are they providing to those around them as well as for the customer. This is the question of whether banks are responsible, as community-level institutions, for delivering social impact to local communities. Do they push for environmental sustainability, reducing carbon emissions, racial diversity and human rights - to name but a few of the diverse areas of ESG focus - as a committed pillar of their product offerings to both businesses and their general customer bases, as well as a core pillar of their own culture? 

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Financial Institutions = Ethical Finance?

For a while, banks have been competing with another through various perks like cashback, and points on their credit cards. This is on top of interest rates in savings accounts and other appealing promotions on mortgages, RRSPs, and more. While these are fine and useful products, are they engineered with ESG considerations in mind? 

This is important for banks since, with due consideration, many of these products can be retooled with various forms of sustainable benefit in mind, as can other forms of typical products, such as investment products and services. In fact, research is building in recent years to support the fact that 'anti-ESG' fund - those which conservatively value profit from 'traditional' investment practices in fossil fuels, tobacco, firearms, and other "sin stocks" - performance is waning. Banks that openly do not support sustainable development or asset management with social responsibility in mind are quickly becoming outdated. 

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Local Communities Are Key

Creating a viable image committed to environmental values, therefore, can help banks derive brand appeal for future customer demographics and support growth. With ESG factors involved, customers will also start caring about how employees are treated, what banks are choosing to invest in and what local branches are doing in the community among other things. The better more ethical efforts are, the more likely people would change banks.

Such efforts are amplified for small businesses at the local community scale, where social responsibility in investment practices can reap impactful, localised benefits. A businesses (read: banks) that support local culture, focus on relevant initiatives, and provide a viable example of upstanding business to the community, are always well placed to thrive.

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Banks Are Key To Sustainable Futures

Today banks play a more crucial role now more than ever, which is why they are more secure now than ever as they hold sensitive customer data. On top of the other factors mentioned above, we rely on banks and hold them to incredibly high ethical standards as well as expect transparent reporting from them.

The bank was always 'upheld' as the reliable pillar of the community, since its function was to provide security. There is much opportunity to develop that image, which appeals to personal values so well, again. 

ESG ultimately provides a symbiotic relationship. With the banking industry’s multiple disconnected systems, ESG provides some common ground and helps redefine their operations. It provides clearer expectations that customers can get behind, as well as investors, since they are expecting non-financial institutions to follow specific standards. 

Beyond that, because banks play such a crucial role in daily life, having them embrace ESG adds further reliability and stability to this cause and further pushes towards ESG being a standard for good ethical behaviour.

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