As the ECB shifts focus towards its climate change risks and sustainable finance, it becomes more pressing for banks to make the necessary changes to show compliance not just in 3-5 years but also now. While many banks are struggling to make necessary changes and to meet ECB supervisory expectations for ESG risks, that’s understandable considering ESG regulations are relatively new, with everyone in the same place of building this infrastructure for the first time.
Therefore, the first step building internal ESG capabilities is normally to make sure that you understand the strategy. Any new implementation has to be top driven, with senior management to champion and lead the way.
Start and participate in discussions with regulators
While many of the expectations around ESG are poorly defined, you can start to close those gaps by starting discussions with regulators. Bank executives must talk to regulatory authorities to proactively develop standards and identify solutions – which will allow you to set clear goals to work towards from a practical level. Similarly, working together with other financial organizations to share knowledge,
Get senior management onboard
Senior management already actively engages with peers and regulatory authorities for many aspects of regulatory compliance. Yet, they rarely do so for ESG. Often, this ties into the fact that ESG strategies may be poorly mapped to the business plan. Additionally, the organization may only have limited awareness of what ESG requirements actually are – with everything offloaded to a single team or department. That can be a mistake. Bringing ESG strategy into the business model requires senior management to participate but often senior management won’t be interested until they see direct business impacts. That becomes sort of a chicken and egg problem, in which you have to get started to see anything happen at all.
For this reason, banks should take steps to assess the business model and to map relevant ESG aspects to every part of it. If you can clearly align ESG compliance with the business model, you can more easily get senior management and board members to champion solutions and to build awareness of ESG practices. Similarly, if you can map ESG practices and strategy to the business model, you can better map the ESG strategy to the organization’s work processes and teams.
Establish communication channels
ESG strategies have to be integrated into the business, into how teams work, into how decisions are made, and weighed as part of risks associated with every client. That means working to build awareness and responsibilities throughout teams. That should include cross-organizational communication relating to dependencies, needs, and/or synergies based on where and how different teams communicate.
Adopting this in practice might involve using a program approach to ESG, where everyone has roles to fill. It might also include adopting sustainability champions, where every team or department has people to champion and ensure ESG is present in the decision-making.
That should also include aligning ESG strategy with regulatory requirements and expectations. Ideally, regulatory requirements can be leveraged to strengthen the ESG strategy, but that requires maintaining open communication, keeping those channels open, and making adjustments as things change.
Having a robust ESG strategy in place, mapping it to the organization’s business strategy, and ensuring that strategy is aligned with teams and how people actually work is crucial to the success of that strategy.
If you’d like to further explore strategies for your bank, contact us to schedule a cup of coffee, the team at ACE is happy to help.
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