Pera ESG Solutions for Banks’ ESG Framework
ESG Scoring in Banking and Risk Management Services
Climate change and the digital transformation process brought the concept of ESG (environmental, social and governance) to the agenda of all sectors. The banking sector is at the center of this agenda. Banking system plays a vital role in directing and financing resources to new projects sensitive to ESG. Banks that update their business models in the early period within the framework of ESG are expected to gain a competitive advantage. For example, the European Bank for Reconstruction and Development (EBRD) announced in its 2020 Sustainability Report that the Bank aims to increase the “green” investment rate above 50% in the 2021-25 period (see EBRD, 2020).
The banking system has been working on reputation for centuries. One of the important factors affecting the reputation of the banking system in the recent period is the credit and risk management policies that are expected to be shaped within the scope of ESG. The commercial reputation of banks, which provide loans to projects that are environmentally sensitive, development-oriented, gender-equal, and reduced carbon emissions, increase along with their risk management and financial success. Now, banks that ignore the responsible corporate governance and investment principles shaped within the scope of ESG may face additional risks. KPMG states that sustainability will create a serious transformation in banking and not getting involved in this process is no longer an option (see KPMG, 2021).
Turkish Banking Sector and ESG
After Turkey signed the Paris Climate Agreement, it is not difficult to guess that many regulations await the banking system within the framework of ESG. In its advisory decision taken on November 2, 2021, the Banking Association of Turkey (TBB) recommended banks to develop and implement inclusive and widespread financial instruments by raising the awareness of customers, in areas and methodologies determined by the banks themselves on green financing issues. The Banking Regulation and Supervision Agency (BDDK), on the other hand, announced its Sustainable Banking Strategic Plan with its decision dated 24 December 2021 and numbered 9999. It was emphasized that in the mentioned plan, it was aimed to take ESG criteria into greater consideration by the banking sector and thus to benefit more from foreign green finance markets. The Capital Markets Board’s (CMB) regulation of green debt instruments and green lease certificate issuances in the capital markets is another important development for banks’ ESG-oriented strategies. On a global scale, it seems inevitable that the ESG regulations in the European Union, which is Turkey’s main trading partner, will affect the banking system in our country. For example, banks of countries that are included in the Monetary Union have to submit stress tests for climate risks to the European Central Bank (ECB) from 2022. Banks will do this according to the new classification principles set by the EU. In this context, it is considered certain that banks will be subjected to a more intensive evaluation on ESG practices in the coming period within the scope of EU regulations.
Effects of high ESG score to Bank’s performance
It is clear that banks that get a valid score in sustainability, especially in ESG scores, will gain advantages in many areas such as finding foreign financing, expanding their customer base, and increasing employee satisfaction. Friede et al. (2015), in the light of the results of 2,200 academic studies, argues that there is a positive relationship between ESG and financial performance for banking. Wajahat et al. (2021) also shows that banks with high ESG scores have an advantage over their competitors in cash flow and profit margins. In the same study, it was determined that ESG had a positive effect on stock performance.
At this point, banks that do not yet have an ESG rating need to act proactively and quickly create the necessary infrastructure for a high ESG rating. Banks with ESG ratings may have the chance to re-analyze the rating quality with alternative scoring channels.
Türkçe
