1、While financial institutions are increasingly integrating ESG factors into core processes,theres still a gap between aspirations and results.By Maria Teresa Tejada,Oren Salomon,and Michael KochanHow Financial Services Firms Are Wrestling with ESG Copyright 2023 Bain&Company,Inc.All rights reserved.1

2、How Financial Services Firms Are Wrestling with ESG IACPM|Bain&Company,Inc.At a Glance Bains new survey,together with the International Association of Credit Portfolio Managers(IACPM),of 55 global financial services firms details how banks and other financial institutions are responding to ESG press

3、ures from regulators,shareholders,and customers.Views differ on whether ESG pillars primarily represent downside risks to be managed or upside opportunities to be captured,with European respondents most bullish on the opportunities.While institutions are making progress,theyre hampered by a lack of

4、consensus on frameworks and methodologies,as well as unclear decision rights and different regulatory priorities among the regions.Four areas merit attention:aligning stakeholders on decarbonization,deciding transition finance priorities,defining strategies to address customer demand,and augmenting

5、climate-risk data analytics capabilities.For several years,pressure has grown on financial institutions to clarify their environmental,social,and governance(ESG)commitments and strategies.While their internal and external stakeholders do not always share the same agendas,calls have been mounting for

6、 institutions to play a more active role in supporting the transition of the economy away from fossil fuels.Many are already taking steps to do just that.But when it comes to devising and executing a longer-term strategy that responds to ESG imperatives,two perspectives have taken shape.The details

7、of these perspectives emerge in Bain&Companys new survey of 55 companies(mainly banks)globally,representing over$40 trillion in assets,that belong to the International Association of Credit Portfolio Managers(IACPM).Some of the respondents view ESG activities in largely defensive terms,as downside r

8、isks to manage.Others view these activities from a more offensive stance,as upside opportunities that their companies should try to capture in order to create strategic value(see Figure 1).The divergence results in part from uncertainties around the extent and shape of certain risks.For instance,how

9、 climate change will affect individual consumers and businesses,including their demand for financial products and services,as well as the time frame for material changes in temperatures,water levels,and so on,has yet to be determined.Theres also a dearth of data and a lack of consensus on transition

10、 risks pertaining to changes in policy and customer preferences.Such transition risks include the speed of a shift in lending from heavily polluting industries and projects to cleaner ones,and the effect on revenues and profits.2How Financial Services Firms Are Wrestling with ESG IACPM|Bain&Company,

11、Inc.Getting good data on the likelihood of these risks and the potential effects would allow financial institutions to reprice credit risk and strengthen capital buffers to absorb credit and operational losses from future events.To better understand how the industry is responding to ESG pressures,Ba

12、in recently conducted the survey of IACPM member firms,augmented by conversations with respondents and the groups advisory council,as well as senior executives in risk,finance,and sustainability functions.The survey goes into detail on climate change,with rich data on disclosures,strategic planning,

13、governance,operating models,and implementation.Regional differences and lessons from EuropeGlobally,external pressures for more ESG activities will only increase,with 83%of respondents expecting more influence from regulators,vs.67%from customers and 53%from shareholders.Theres an important regional

14、 component as well.European and Asian respondents feel more influence from regulators than their counterparts in the Americas do,while shareholders have greater sway in the Americas.Many European banks have supplemented their customer data with external data and relied on sophisticated modeling tech

15、niques to estimate potential losses from climate change.While regulatory expectations differ markedly between Europe and the Americas,and the experiences are not directly transferable,Europe can serve as a robust source of insights in supporting the transition to manage climate risks.Figure 1:Respon

16、dents are roughly split on defensive vs.offensive postures toward ESG issuesSource:Bain/IACPM ESG survey,November 2022(n=55)Environmental transition postureis defensive or offensiveSocial posture is defensiveor offensiveExplicit public commitmentto net zeroSelf-assessment of current ESGposition peti

17、tionStated ambition of future ESGposition petitionDefensiveDefensiveNo plans for futureSignificantly laggingSignificantly laggingOffensiveOffensiveAlready madeSignificantly aheadSignificantly aheadAverageResponse distribution for all institutions(larger bubbles indicate higher frequency)3How Financi

18、al Services Firms Are Wrestling with ESG IACPM|Bain&Company,Inc.The balance of managing risks and seizing opportunitiesViews differ on whether ESG pillars primarily represent downside risks to be managed or upside opportunities to be captured,on which pillars create the most value,and on how much va

19、lue could be created.For instance,only about 55%of respondents believe a net-zero carbon emission strategy reduces the cost of risk,and only 40%believe it will reduce the cost of funding in three years.Such a strategy might involve the introduction of green products and services,which could both enh

20、ance returns and introduce higher risk that would need to be reflected in the pricing of products.In Europe,respondents identified opportunities to create value across a wider spectrum of environmental concerns,including climate risk and the transition to a cleaner economy.In the Americas,financial

21、institutions are more likely to recognize social issues(including diversity,equity,and inclusion),along with the socioeconomic implications of managing and mitigating climate issues,including the effects on financially marginal households.Asia-Pacific financial institutions have a more balanced view

22、 among the ESG categories and between risks and opportunities(see Figure 2).Figure 2:ESG priorities vary by region,with Asia-Pacific taking a more balanced perspectiveSource:Bain/IACPM ESG survey,November 2022(n=55)Americas020406080100%SocialSocialGover-nanceEnviron-mental(transition)Environ-mental(

23、physical)Gover-nanceEnviron-mental(transition)Environ-mental(physical)SocialGover-nanceEnviron-mental(transition)Environ-mental(physical)020406080100%020406080100%EuropeAsia-PacificPercentage of responses to“Do you consider ESG more as a risk/regulatory requirement or as an opportunity to create str

24、ategic value?”More of a riskBalance of risk and opportunityMostly risk/regulatory requirementOpportunity to create strategic valueMore of an opportunity4How Financial Services Firms Are Wrestling with ESG IACPM|Bain&Company,Inc.How banks are respondingMost banks are starting to incorporate responses

25、 to environmental pressures into their operations.In every region,theyre launching green products,such as clean-energy project financing in commercial markets,and many expect to expand the consumer portfolio to car loans,mortgages,and deposits over the next three years(see Figure 3).Recognizing that

26、 climate-related perils may contribute to credit risk across their portfolios in ways that arent yet fully understood,they are also starting to incorporate climate risk factors into strategic planning,credit origination,and insurance underwriting,in addition to credit portfolio management and stress

27、-testing scenarios(see Figure 4).The great majority of respondents say they consider both physical and transition risks when performing portfolio management and capital planning analyses.The most common scenarios they consider are extreme rainfall and flooding,along with climate policy and regulatio

28、n.However,while respondents indicate they increasingly look to integrate ESG factors into core processes,its still early days.There is a substantial gap between their growth plans and the extent to which they operationalize ESG factors.Some 65%of respondents have yet to incorporate climate data and

29、metrics into credit underwriting processes,with European banks being the furthest along.And while 81%of respondents have identified physical and transition risks,approaches to measurement are still evolving,with half of respondents having quantified their risk exposure.Figure 3:Banks expect to broad

30、en their green product portfolios over the next three yearsSource:Bain/IACPM ESG survey,November 2022(n=55)Percentage of responses to“What kind of green products and services does your institution have or planto have in the next three years?”Green bondsSustainability bondsGreen project financeSocial

31、 bondsGreen commercialbuilding loansGreen car loansGreen mortgagesGreen depositsGreen securitizationCarbon commoditiesGreen indexesGreen savings accountsGreen home equity loansGreen credit cardsGreen venture capital,private equityCorporateCorporateCorporateCorporateCorporateRetailRetailRetailCorpora

32、teCorporateCorporateRetailRetailRetailCorporate86%89%848976765965547349654362325727432743814351430In next 3 yearsToday5How Financial Services Firms Are Wrestling with ESG IACPM|Bain&Company,Inc.A lack of consensus on frameworks,methodologies,and tools has hampered their full incorporation

33、 into respondents operations;this is exacerbated by different regulatory priorities among the regions.Many respondents expect to shift to proprietary methodologies for identifying and managing physical and transition risksfor the latter,going from 58%of respondents today to 68%in three years.Consens

34、us is limited on the types of targets,with respondents using a mix of relative or absolute targets.Industry experience suggests theres questionable value in using 10-to 30-year forecasting horizons.Still,46%of respondents expect to limit credit underwriting to low-carbon,ESG-aligned customers by 205

35、0.Who makes decisions?Unclear accountability,decision authority,and other operating model issues also weigh on respondents.While most institutions have built central sustainability teams,many have not yet fully integrated these capabilities and ESG strategies into lines of business.Some 40%of respon

36、dents report they coordinate and execute ESG initiatives through a centralized team,rather than the best practice of embedding accountability for targets and initiatives within the business line(see Figure 5).Indeed,many respondents want to better engage frontline teams in identifying risks and defi

37、ning targets.They also aim to hold frontline risk managers accountable for identifying and mitigating Figure 4:European banks have made the most progress on incorporating climate metrics into credit underwriting,with other regions expected to follow that leadSource:Bain/IACPM ESG survey,November 202

38、2(n=55)Percentage of responses to“Does your institution integrate climate factors into its credit underwritingprocess to inform risk ratings,or is it planning to do so in the future?”020406080100%All Already in placeWithin a yearIn next 13 years Global banksAmericasEuropeAsia-Pacific6How Financial S

39、ervices Firms Are Wrestling with ESG IACPM|Bain&Company,Inc.these risks.This is a work in progress,as 65%have yet to define who has primary accountability for identifying and addressing climate risk.And 55%of financial institutions cite unclear roles and accountabilities for managing climate risk be

40、tween business and corporate functions.European respondents have made the most progress in these areas of governance.Further,only half of respondents that have made public net-zero commitments have integrated climate metrics into staff performance objectives.Four areas that merit attention and resou

41、rcesAs banks and other financial institutions consider their next steps with ESG strategy,they can most usefully focus on four critical areas.Managing stakeholders to align views in support of decarbonization.Financial institutions will want to align external and internal expectations on how to real

42、ize value creation from ESG.They can do this by,among other things,defining decarbonization plans and investing in transition finance capabilities.Total shareholder return tied to future profits from the greening of products and services is the most quantifiable metric.In commercial lending,this can

43、 be achieved by ensuring that credit spreads reflect a borrowers ability and willingness to repay(captured in the probability Figure 5:Many respondents lack ESG teams embedded in business units or climate metrics integrated into performance reviewsSource:Bain/IACPM ESG survey,November 2022(n=55)Perc

44、entage of responses to“How is ESG leadership embedded into your institutions frontline business activities?”Percentage of responses by institutions withnet-zero commitments to“Has your institutionintegrated climate metrics into performance reviews,or is it planning to do so in the future?”Part of jo

45、b descriptions for frontline staffGroup-led centralized teamBoth centralized and embeddedTeams embedded within the businessIn next 13 yearsIn next 3+yearsDid not answerAlready in placeWithin a year020406080100%AllGlobalbanksAmericasEuropeAsia-PacificInsurers and assetmanagersAmericasAsia-PacificInsu

46、rers and assetmanagersAllGlobalbanksEurope020406080100%7How Financial Services Firms Are Wrestling with ESG IACPM|Bain&Company,Inc.of default)based on climate risk factors over the life of the loan.Collateralization can be defined in a way that allows the bank to preserve coverage of the loan if a b

47、orrower defaults.To the extent that banks integrate climate risk factors into credit underwriting,internal risk ratings will evolve into climate riskadjusted ratings.These will allow credit risk to be structured,priced,and managed at an individual borrower level and an aggregated portfolio level.In

48、such a scenario,banks will no longer be able to rely primarily on industry classification codes to manage sector concentrations.Instead,they will need expanded data sets to evaluate industries transition from brown to green under different macro and climate scenarios over longer time horizons.Theyll

49、 also need to enhance and validate loss-estimation models to reflect a greater number of variables and assumptions.Making decisions on transition finance priorities.Financial institutions must sharply define decision rights so that they can effectively execute their strategy.Opportunities to create

50、value in fields such as transition finance often are based on emerging technologies or funded by earlier-stage ventures.Typically,these require extensive deliberations to inform the banks strategy,align core activities,and manage the risks.At times,its not clear who among the executive team should m

51、ake decisions on how to deploy capitaland that needs to change.Financial institutions must sharply define decision rights so that they can effectively execute their strategy.Opportunities to create value in fields such as transition finance often are based on emerging technologies or funded by earli

52、er-stage ventures.Boards will also play a vital role in informing strategic priorities and providing risk oversight on the design and implementation of these plans.Defining strategies to address customer demand.In the transition to decarbonization,the leaders will be those financial institutions tha

53、t heed the logic of the business and customers priorities.Government directives and financial regulations will spur substantial growth in transition-related investment,requiring up-front financing.While central sustainability teams may be well placed to assess stakeholder demands,a business-led,cust

54、omer-first perspective is most useful for addressing client needs in transition finance.Commercial opportunities include green products and services that appeal to discerning customers,or financing structures,such as green bonds,tailored to investor requirements.8How Financial Services Firms Are Wre

55、stling with ESG IACPM|Bain&Company,Inc.Augmenting climate-risk data analytics capabilities.Integrating climate risk factors into core banking processes and pursuing sound governance practices will make value creation more sustainable over the long term.Many banks struggle to efficiently tap their ow

56、n client data,let alone leverage external data that can help inform group-level and business-level strategies.In areas such as credit portfolio management and real estate financing,credit providers have used sector data to estimate potential losses under different macro and climate scenarios.Increas

57、ingly,they can use other data sources to estimate transition risk and physical risk,which then factor into climate risk models.This can help banks anticipate losses and enhance preventative programs.Banks will need to extend their data analytics capabilities so they can identify and validate the new

58、 data elements and draw statistical correlations relevant to a range of potential climate-related outcomes.When it comes to financial institutions ESG efforts,the gap between aspirations and results has widened.Bridging this gap entails more focused strategies,decision making,and analytics savvy.Tha

59、ts what it will take to realize tangible value from climate-related products,services,and advice.For more information,visit Bold ideas.Bold teams.Extraordinary results.Bain&Company is a global consultancy that helps the worlds most ambitious change makers define the future.Across 65 cities in 40 cou

60、ntries,we work alongside our clients as one team with a shared ambition to achieve extraordinary results,outperform the competition,and redefine industries.We complement our tailored,integrated expertise with a vibrant ecosystem of digital innovators to deliver better,faster,and more enduring outcom

61、es.Our 10-year commitment to invest more than$1 billion in pro bono services brings our talent,expertise,and insight to organizations tackling todays urgent challenges in education,racial equity,social justice,economic development,and the environment.The IACPM is an industry association established

62、to further the practice of credit exposure management by providing an active forum for its member institutions to exchange ideas on topics of common interest.The Association represents its members before regulatory and administrative bodies in the US and internationally,holds biannual conferences an

63、d regional meetings,conducts research on the credit portfolio management field,and works with other organizations on issues of mutual interest relating to the measurement and management of portfolio risk.Currently,there are over 130 financial institutions based in 30 countries that are members of the IACPM.More information is available at www.iacpm.org