Environmental, Social and Governance, or ESG for short, is a topic that concerns companies in all sectors at a wide variety of levels. As part of our current blog series, we are highlighting important aspects of ESG. Dr. Sven Ludwig is a Senior Advisor for Governance, Risk Management & Compliance and ESG Lead at ifb group. The internationally operating consultancy specializes in challenges around financial and risk management, especially focusing on banks and insurance companies. Dr. Ludwig has worked in finance for around 25 years, speaks regularly at major conferences and is the author of more than 30 specialist publications. In the current article, the expert sheds light on the impact ESG guidelines have on the actions of the financial services industry and the particular challenges that arise in this context.
ESG complements traditional factors in lending
ESG plays an important role for banks and insurance companies in two respects. On the one hand, companies must of course ensure that they implement and "live" the guidelines themselves. This means, for example, reducing their own emissions, designing processes in a sustainable manner, committing to equality and fair education and promotion opportunities, and promoting decent working conditions.
On the other hand, however, the so-called financed issues play an even more decisive role, i.e. the issues in which financial service providers are indirectly involved, usually as part of their business activities in the areas of lending and insurance activities. The focus here is on ESG implementation among the customers of financial and insurance service providers.
From a political perspective alone, banks and insurance companies and the payment flows and risk hedges associated with them have a key role to play in implementing the climate and energy transition. The degree of implementation of ESG guidelines is increasingly becoming a factor in lending, for example, and complements classic criteria such as creditworthiness.
With regard to the reporting obligations of financial service providers, the EU taxonomy also comes into play. Here, the so-called Green Asset Ratio (GAR) seems to be developing into a new key performance indicator, which requires very complex data requirements and data aggregations during disclosures. All of this has an impact on areas such as financing and investments, and will continue to grow in importance in financial institutions and insurance companies. At the same time, the need arises here for suitable software solutions and platforms with which the required data and KPIs can be collected, aggregated and disclosed efficiently and completely in one place.