There is growing recognition that a sustainable approach to financing and investing reduces risk and increases financial reward, and sustainability leaders are doing their best. However, those brave enough to take on this role at banks say they are agents of change first and foremost, and embracing the new mindset is paramount.
“The sustainability manager is the agent of change,” says Francesca Messini, sustainability manager and partner at consultancy Deloitte Luxembourg. “Changing Attitudes, Policies, Procedures”. This view has been echoed by others in similar roles. “The role of sustainability is 80% change management,” said Letizia Hamon, head of sustainable finance at the Luxembourg Stock Exchange, in an interview with Delano in January 2022.
As such, the CSO (Chief Sustainability Officer) is expected to lead the sustainability strategy, act as a change agent to change mindsets, and integrate sustainability into the day-to-day operations of the bank. But what does this mean in practice?
Yesterday and today
Historically, the closest relatives of sustainability managers have been corporate social responsibility (CSR) managers. These functions were generally close to corporate communications and ensured responsible investment in non-governmental organizations, mainly environmental ones.
According to Francesca Messini, the sustainability manager is different. “Environmental and social management is now part of the organization’s DNA. CSO is the glue that holds it all together.”
According to a joint report by the European Banking Federation (EBF) and Deloitte, published on June 14, 80% of the 28 European banks surveyed have a sustainability manager. These managers usually reinforce the bank’s internal resilience capacity. Therefore, they determine the strategy, prepare the staff for its implementation and increase the level of sustainability of the bank itself.
According to Francesca Messini, banks are the only ones who can support companies with solid transition plans. This is due to two factors: external, for example, banking rules and shareholder requirements; and internal: pressure on the bank to manage sustainability risks, increase the impact of sustainability on business decisions, performance and competitiveness, and integrate it into corporate, management and business strategies.
While the role of CSOs barely existed five years ago, it has evolved. It no longer focuses on the “G” of management, but on the “E” and “S” of the environment and social issues, says Francesca Messini.
She gives several practical examples. “When it comes to environmental impact, you have to look at a bank’s loan portfolio and look at the due diligence of the underlying assets. As far as the bank itself, you look at the environmental impact of the bank building, its business travel planning, its fleet.”
Social impact targeting works the same way. “Again, you look at loans and make sure they allow certain communities and certain demographics to access funding. This may require the application of different criteria than before.”
Until now, many sustainability managers in banks have focused on the environment rather than the social. According to a joint report by EBF and Deloitte, 79% of surveyed banks have chosen to focus their sustainability strategy on climate action sustainability goals, compared to just 7% on social goals such as hunger or drinking water and sanitation (11% ) .
This can be partly explained by the fact that climate action impacts other United Nations Sustainable Development Goals (SDGs), the report notes. Or that almost 50% of bank risks in the eurozone are directly or indirectly related to climate change.
However, Francesca Messini believes that this will also change. “I think there will be a shift towards more public attention.” According to the EBF and Deloitte report, the historical problems of social performance are rooted in a lack of metrics, more difficult things to track and measure, and less reliable market data.
With the advent of the first draft of the EU social taxonomy and the new EU supply chain due diligence regulation, the foundation is being laid. “The impact on society can be explored in a company’s supply chain – human rights, working conditions – just like the impact on the environment.”
Resources and Talents
One of the biggest challenges CSOs face is building a team around them. The novelty of sustainability in banking means that most candidates simply don’t have experience. In fact, less than 20% of those interviewed for the EBF and Deloitte report have taken a similar position in the past.
This observation does not surprise Francesca Messini. “Resources and talent are a challenge. The combination of finance and scientific knowledge is not associated with standard financial profiles.” Therefore, many banking organizations create a team that combines these skills and then invest in the development of new team members.
The survey found that 72% of sustainability leaders come from within their organization’s business department or have professional business experience. Previous positions include Business Development Manager, General Manager or Export Finance Manager.
The EBF and Deloitte study indicates that this is not a problem in itself, as it shows that banks are approaching sustainability from a business perspective.
However, Francesca Messini believes that academic and professional experience will grow starting with degree courses. “A really positive market trend over the past four or five years is that students are learning sustainable finance. This is happening even at the University of Luxembourg.” In 2019, the University of Luxembourg launched a sustainable finance project within its finance department. “As these graduates work in banks, we will see more experience.”
People interviewed for the study emphasized the need to have more scientific profiles in their team on topics such as biodiversity, water management or renewable resources. The interviewees also highlighted the need for staff trained in the social aspects of ESG, such as human rights and working conditions.
From risk to opportunity
Sustainability moves from risk to opportunity to expand products in existing markets or capture new ones. The millennial generation is a market marked by research that puts values at the heart of decision making. How can CSOs make the most of these opportunities?
“Access to the CEO is fundamental. It must come from above. The CEO sets the tone,” says Francesca Messini. She predicts that the shift from risk management and compliance to business strategy will see CSOs increasingly on the leadership team, along with the CFO and COO. “He will rise in prominence, gaining more decision-making power,” she says.
According to her, the increasing complexity of regulation due to the fragmentation of the European market means that CSOs will also be a point of interaction and dialogue with the authorities. This also applies to the lack of reliable ESG data. Respondents to the EBF and Deloitte survey called for the creation of quality ESG data and reporting systems in Europe. As the role of CSOs grows, so does their influence and power to lobby for a universal approach to data.
But Francesca Messini’s perspective on the long-term role of CSOs is surprising. “In the long term, this role may disappear altogether,” she says.
“There have already been survey respondents who said they don’t have CSOs because sustainability is already built into all levels of their organization.” While the absence of the need for CSOs can be considered a successful implementation of ESG, Francesca Messini believes that this will be rare in the short to medium term.
“These respondents were banks that were built with sustainability in mind, so it makes sense not to have just one person as a CSO. However, for existing banks, the role of CSOs is essential to facilitate this integration.”
For Francesca Messini, who came to the position of sustainability manager after working in the consulting industry, what is her most valuable skill? “Negotiation. This is the most important skill.” Like any other indicator, there is still a lot of work to be done to integrate ESG into the company.
This article is written for
Delano, translated and edited for Paperjam.
This article is taken from the Paperjam + Delano Finance newsletter, a weekly financial news meeting in Luxembourg.
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