The Taiwan Banker

ESG is arguably the most popular term in finance today. It is not only of great concern in this industry, but has also spread to other fields such as culture and education. We can visualize the popularity of the term through Google searches (Figure 1). Originally, ESG was a voluntary concept. More recently, financial institutions in many countries have gradually incorporated ESG into their performance metrics. It involves almost all employees in the front, middle and back offices. Since most of today’s financial practitioners never took relevant courses when they were in school, and the scope of ESG is quite wide, a broad shortage exists in ESG talent.Quality of training is mixedThe concept of ESG can be traced back to the UN Global Compact launched by then-UN Secretary-General Kofi Atta Annan in 2000, emphasizing the importance of human rights, labor security, environment and prevention of corruption. In 2005, Annan invited the heads of the world’s 50 largest financial institutions to hold a “Who Cares Wins Conference” for a more in-depth social dialogue. During the meeting, there was a high degree of consensus that the three elements of ESG are the cornerstone of long-term stable development of the financial industry in a changing world. Back then, there were only 10 principles in the Global Covenant, but now various international ESG assessments have hundreds of indicators for. At first, it was only a principled suggestion, but with this global attention, more and more institutions want to establish more specific standards. ESG rating agencies such as MSCI, Sustainalytics, Dow Jones and FTSE have now developed nearly 100 indicators in dozens of dimensions under the three pillars of ESG.Since each agency has its own preferences and purpose of use, their methodology and assessment structure are completely different, and the scoring and weighting methods of the index questions are also quite different. Thus, many rated companies complain that ESG is extremely broad and experts are hard to find, and have asked for help. As a result, there are a multitude of ESG training courses in the market at present; their quality is mixed. Some institutions with no relevant past achievements have even created courses from scratch, while charging high fees. Exaggerated and false information abounds.With so many questions, where should organizations start? In short, actual compliance with the various regulations of each industry is the basis for ESG implementation – such as the Corporation Act, Securities Exchange Act, Insurance Act, Labor Standards Act, Gender Work Equality Act, and various environmental protection laws. Of course, regulations are only the foundation. Organizations can also add other policies on that basis to fulfill their corporate social responsibility or contribute to sustainable development.With so many projects involving ESG and limited resources, one may ask if ESG is really a priority. It is not easy to cover everything. In fact, different industries face significant differences in ESG risks according to their specific characteristics, so their ESG priorities will also vary. For example, the petrochemical industry has the greatest environmental risks, so pollution prevention and carbon reduction will account for a higher portion of its ESG work. Pharmaceutical factories, on the other hand, face fewer environmental risks, making their social and governance aspects more important.In the past, some would say that the financial industry emits little pollution, so its ESG should focus on society and governance. However, more stakeholders are expecting finance to make use of its investment and financing role to drive the whole society and economy towards sustainable development. In particular, climate change is becoming increasingly severe, and the transmission of climate risks to financial risks is becoming clearer. Therefore, the EU and other countries have begun to incorporate climate risks into their financial supervision. In addition, during the COP26 conference at the end of 2021, major global financial institutions established the Glasgow Financial Net Zero Alliance, which pledged to include their clients’ carbon emissions into their own Scope 3 emissions to achieve net zero emissions by 2050. Therefore, greenhouse gas emissions have become the main focus of ESG.Table 1 shows the current focus of government policy, various guidelines, and international evaluation indicators.The biggest headache in ESG is disclosure of climate risks, as well as the business opportunities and challenges it brings. Examples include the calculation of Scope 3 emissions in the financial sector from investment and financing, and climate stress tests such as transmission of climate risk to credit risk, or the risk of stranded assets from the transition. Other issues include directing funds to support the net zero transition, evaluating green energy project financing, and designing green financial products.Integrating the spirit of ESG into organizational DNAAs mentioned above, the front, middle, and back office of financial institutions, from front-line practitioners to CEOs, are all involved in implementation of ESG. Therefore, institutions should not designate main departments responsible for ESG as they traditionally divide labor. The best practice is to set up a sustainability promotion committee directly under the CEO, so that the spirit of ESG is integrated into the DNA of the organization. Of course, it is better to have a sustainability leader to carry out horizontal integration and become the ESG driver within the organization. The author is a Senior Researcher at the Taiwan Academy of Banking and Finance.