Why Bankers and Traders Need to be Aware of ESG and Sustainability

Over the last ten years, ESG (Environmental, Social and Corporate Governance) has slowly become one of the most critical factors for companies to consider when making business decisions and strategising for the future. It covers a range of factors, from a company’s carbon dioxide footprint to its labour practices and policies to corruption. Research is increasingly showing that companies with a strong focus on improving their ESG impact and operating more sustainably achieve greater financial results.

But the importance of businesses acting sustainably and responsibly isn’t just linked to their financial performance. All around the world, we are seeing increasing levels of extreme weather conditions like severe flooding and droughts, poor living conditions and poverty for millions of people globally. The mistrust of large organizations due to several global scandals is also increasingly affecting businesses and their reputation. Many large corporations being found to have companies in their supply chain that engage in forced labour practices has damaged reputations, share prices and consumer confidence. Corporations and financiers are now required to take responsibility for their entire supply chains through a combination of regulation and consumer demand.

Clients and consumers are becoming increasingly more conscious of a company’s impact on the world and the responsibility they should take to do everything they can to operate more sustainably. Companies that can evidence that they are taking steps to improve their ESG impact and implement more sustainable business policies and practices generate greater customer demand and longer-term commercial prosperity.

Why traders need to be aware of ESG

As stated above, increasing areas of research show that companies that can demonstrate their commitment to sustainable business and improve their ESG impact are generating better traction with clients and achieving better financial results. This, in turn, is enabling access to finance at better rates and better overall investment opportunities.

But commercial benefits are not the only reason traders need to be aware of ESG. Trading businesses have long been subject to various import and export rules, tariffs and laws. It is only recently that trading businesses have faced a new wave of regulation to help limit the damaging impact businesses have on ESG.

The various regulations and frameworks that have been implemented are varied, although they have the same end goal. The EU Taxonomy, for instance, targets businesses specifically that are trading with the EU, meaning that those companies must be able to demonstrate that their business and their activities are compliant with each area of the taxonomy. If not, they will face a harsh penalty if found trading with the EU. The Sustainable Finance Disclosure Regulation (SFDR), on the other hand, targets asset managers and other financial market participants and imposes mandatory ESG disclosure obligations.

Whatever the market, industry or company, trading businesses will need to demonstrate compliance with regulations in the countries and regions they are exporting to and the regulatory framework in the country where their business is located. Failure to comply may mean hefty fines, penalties and restrictions on their trading activities, including import/export activity.

Why banks need to be aware of ESG

Banks are vital enablers of business, global trade and economic growth. They financially support traders through all stages of their development, whether they are a startup, SME or large multinational, and in doing so, they take several risks. The ESG risks involved with financially supporting businesses are now high on the agenda for banks because they must also be able to demonstrate that the activities they are facilitating through the provision of finance are compliant with the various regulations and frameworks being implemented around the world. This means that banks must develop and implement their reporting standards to enable key stakeholders to assess whether they are taking the appropriate action with their clients to help and encourage businesses to act more sustainably.

Banks’ new standards and reporting requirements on the ESG impact of their clients’ activities should become a vital element of any due diligence checks before financially supporting those businesses.

The Coriolis Technologies ESG solution

Coriolis Technologies has developed an ESG scoring platform that scores a company’s ESG impact and demonstrates how a business and its activities are complying with regulatory frameworks and reporting requirements: The United Nations Sustainable Development Goals (UN’s SDGs), the EU Taxonomy and the Sustainable and Finance Disclosure Regulations (SFDR). Additional regulatory frameworks will be incorporated as they are finalized and become legislation. The tool identifies the products and services that a company is dealing in and then maps the product and service global identity codes (HS and NACE codes) across to the UN’s SDGs, the EU Taxonomy and the SFDR, enabling companies to assess, monitor and manage their compliance with those regulations.

The platform provides an automated ESG score to over 380 million companies worldwide, making it scalable for banks and other financial services institutions that have a requirement to integrate ESG assessments into their due diligence processes. The financial services institutions can download a report from the ESG tool in PDF format, enabling an audit trail that illustrates how a company performs against the regulatory frameworks and how sustainable the business activities are. This performance indicator can be used to monitor and assess ESG, and can also be used to set targets and incentivize improvement through, for example, differential pricing and reward for positive change.

The tool will also incorporate a self-reporting element that will allow (client) companies to include more detailed information about their internal policies, practices, and procedures. As a company updates the self-reporting element of the tool and uploads sufficient documentary evidence, the tool’s Natural Language Processing (NLP) technology will assess and verify those documents, enabling the company to improve its initial, automated ESG score. The self-reporting element of the tool allows financial institutions to work with those client companies where they have identified potential ESG risks (or low ESG scores) to understand where meaningful improvement can be made and therefore increase their ESG score.

Why is it essential for banks to act now?

Elements of the EU Taxonomy became mandatory in January 2022, whilst the remaining reporting factors of the Taxonomy will become mandatory in January 2023. Likewise, the SFDR becomes effective from January 2023 onwards. Although the UN’s SDGs are not necessarily a regulation and more a guiding framework, stakeholders and the public alike now expect businesses of all sizes to report on what steps they are taking to align themselves with each SDG within the framework. The UN SDGs are also the framework to which all regional regulatory frameworks are being mapped.

With less than ten months until the enforcement of the EU Taxonomy and the SFDR, organizations and financial services companies must now begin to plan what changes are required to ensure that they can track, monitor and improve behaviours that impact ESG. Failure by the banks to develop and implement effective monitoring and reporting processes will result in reputational damage and severe financial penalties in some instances where the regulations apply directly to financial services organizations. Banks and businesses must act in partnership to ensure that companies make a positive change to improve their impact on ESG.