It is hard to believe that a decade ago, there was little widespread understanding on climate change, let alone the intricacies and interconnectedness of the different elements of Environmental, Social and Governance (ESG). Today, corporates are ensuring that business operations consider their impact on the environment, social wellbeing, and corporate governance. However, there is a certain amount of scepticism out there: is it all talk, or are things really changing?
Certainly, the arguments – especially when it comes to the environment – have become more compelling. The effects of extreme weather and climate change need to be reined in, and this is not merely for altruistic (or even existential) reasons, but also for economic ones. The EU is aiming to be climate neutral by 2050, and has launched a package of policy initiatives, called the European Green Deal, which aim to reduce net greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels.
However, reversing the negative effects through the Green Deal will not only affect the climate, but help to improve food supply and security, create innovation in energy and resources, improve mobility and provide training which will support the transition. Apart from this package, we are witnessing more requirements and onerous regulations being imposed on businesses, with the first in line being public interest entities and financial institutions. Indeed, several guidelines and definitions have been shared by the European Banking Authority, the European Central Bank, and the Malta Financial Services Authority, to name but a few. These cover several topics including ESG risk-assessments, a taxonomy of what constitutes ‘green’ investments, and how sustainable finance is linked inexorably to ESG principles.
The Malta ESG Alliance (MESGA) has been very active since it was set up last year, and much of the enthusiasm comes from its founding members, who have not only embraced the principles, but work hard to instil them into their own operations. Read on to find out how three of the domestic banks, being founding members of MESGA, are looking at adopting ESG and what it means to them in concrete terms.
HSBC Bank Malta plc
What policies can a bank adopt to drive funding towards climate-friendly initiatives?
The net-zero emissions transition will require significant investment where financial institutions will have an important role to play. Beyond being responsible of their own emissions, banks can act as climate partners engaging with individuals, corporations and governments, providing and channelling the finance needed to invest in new and sustainable business models.
What impact would these policies have on your customers? Do you feel that there is enough awareness of how some sectors will be affected – whether negatively or positively?
One of the pillars of HSBC’s strategy is to help deliver a net zero global economy, and achieve net zero in our operations and supply chain by 2030 and financing portfolio by 2050. HSBC is working with clients to help them reduce their emissions and scale up low-carbon solutions enabling economies to progressively move away from high-carbon activities. Moreover, HSBC is providing finance to accelerate climate change solutions and building global partnerships to help channel investment swiftly towards sustainable projects.
Does your bank see ESG as a cost or as an opportunity?
Current challenges in the global energy market have highlighted the complexity and importance of securing an orderly transition, including the need to rapidly scale climate solutions to provide cleaner and more affordable and reliable replacements for unabated fossil fuels. Companies need to change behaviours and create new ways of doing business, to ensure a just transition, and account for impacts on communities, workers, and the environment. All corners of the financial sector will play a pivotal role in enabling such a whole-economy transition.
HSBC is committed to a sustainable future, dedicating between $750bn and $1trn, to help 1.5 million customers to make a lasting sustainable transition.
Your Bank is also a member of MESGA. As a corporate, what is it doing to lead by example?
The Malta Chamber and HSBC Malta Foundation are working on a sustainability project titled “Establishing Malta’s Framework for a Net Zero Carbon Building”, targeting the country’s building and construction sector with the goal of raising standards in energy efficiency and conservation. As a bank that is constantly investing in the long-term success of the communities in which we operate, we believe that this is both a compelling and far-reaching project which we anticipate will have a positive impact on the environment and therefore the social well-being of Malta’s citizens. Funded by the HSBC Malta Foundation, the project reflects the Bank’s commitment towards a smart, sustainable island, in line with Malta’s climate commitments.
Bank of Valletta plc
What policies can a bank adopt to drive funding towards climate-friendly initiatives?
Firstly, a bank should undertake a materiality assessment to identify key risks suitable for the country (Malta). Once, this is carried out – incorporating credit risk, operational risk, reputational risk, business risk, liquidity risk and market risk, ideally – the granular information must be used to either clean the lending and Treasury portfolio to exclude those sectors that are harmful to the environment or enablers of climate change, or else align the portfolio to the climate Paris Agreement. Another transition option could be the idea to impose limits on heavy-emitting sectors where a bank can apply a concentration analysis on a quarterly basis, imposing KRIs and inform management through a governance structure.
What impact would these policies have on your customers? Do you feel that there is enough awareness of how some sectors will be affected – whether negatively or positively?
The impact is organic. Whether we like it or not, both the ECB and the EU are pushing towards this direction. Those sectors that are regarded as climate change enablers must change their business models, otherwise they will be pushed out of the market. Today, there is awareness but only at a high level. At the technical level there is no information, and many conferences are mixing regulations and prudential requirements.
Does your bank see ESG as a cost or as an opportunity?
For us it is an opportunity to grow our business, thereby seizing the opportunity and aligning to the current zeitgeist.
Your Bank is also a member of the MESGA. As a corporate, what is it doing to lead by example?
We have restructured the entire system when it comes to the implementation of Climate and Environmental Risks. We carried out a materiality assessment, we have an ESG Strategy in place, calculated the financed emissions of the bank, and aligned all our internal operations to the ECB’s 13 Expectations and Guidelines and the Thematic Review. Furthermore, the bank continues to engage with its clients to inform them about ESG risks and the required transformation to a more sustainable path.
APS Bank plc
What policies can a bank adopt to drive funding towards climate-friendly initiatives? Do you feel that there is enough awareness of how some sectors will be affected – whether negatively or positively?
At its inception, APS sought to serve its community, initially prioritising social wellbeing. Today, the bank considers broader issues in line with the Sustainable Development Goals (SDGs). APS is seeking to strike a balance between robust climate risk mitigation, and increased transparency and reporting. Today, APS has already embarked on a project to report on its Scope 1, 2, and most of the categories within Scope 3 emissions.
Does your bank see ESG as a cost or as an opportunity?
The integration of ESG is critical for the communities we serve. The pillars that underwrite our ESG strategy are broad and cover various elements enabling us to provide impactful ESG products to our customers.
Reporting is seen as an important element in our approach to ESG as it allows us to communicate the actions we are taking with our stakeholders. We aim to go over and above the mandatory reporting required on climate disclosures, by agreeing to various ESG commitments, the first of its kind for a local bank. These include facilitating quarter of a billion of sustainable finance by 2030, reducing the impact of our operational emissions by 30% by 2030, and establishing the baseline for our financed emissions to align our lending to reach carbon neutrality by 2050.
What impact would these policies have on your customers?
The Green Term Deposit (GTD) is the first fixed term deposit of its kind in Malta, where customer deposits will be used solely to finance environmentally friendly projects and companies that qualify as green lending. GTD users will receive quarterly reports on how the green deposits are used.
Take up of the GTD by existing and new customers has been encouraging, as is the performance of our ESG lending product suite. Popular ESG products include our social lending schemes such as the home deposit and equity sharing scheme. Our Green Lending products have also seen strong demand, in particular our Green Home Loan which encourages and rewards customers who opt to purchase more energy-efficient and sustainable homes.
Your Bank is also a member of MESGA. As a corporate, what is it doing to lead by example?
APS Bank has taken a positive approach to ESG, recognising that there are economic opportunities from the low carbon transition. Complementing this, was a commitment to MESGA to expand our ESG product suite as well as adopt a methodology of assessing our lending’s impact which goes beyond climate change and social inclusiveness, through the launch of a Responsible Lending Policy (RLP). The RLP – a first of its kind in Malta – applies a local lens to sectors which potentially have a significant impact on people and/or the environment.
Our ESG journey as a local Maltese bank is ever-evolving and one which we are committed to at every level across the bank.
This article is part of a series of articles by MESGA members and their strategic advisors.