Many banks pursuing the business of ESG finance have discovered that they do not face a financial trade-off. New analysis by Bain & Company shows that the higher costs of diligence and reporting are offset by a lower cost of risk: European members of the Global Alliance for Banking on Values had a five-year average cost of risk of 25 basis points, 32% lower than the top 25 European banks by assets in 2019 (see Figure 1).
Figure 1: Banks with a strong ESG portfolio have a significantly lower cost of risk
The time is ripe, as financing with an eye to ESG finance issues and not just returns has moved into the mainstream. HSBC, currently Europe’s second-largest financier of fossil fuels, recently broadened its ESG position by committing to reduce financed emissions from its portfolio to net zero by 2050 or sooner. The bank aims to provide between $750 billion and $1 trillion in sustainable finance by 2030.
ESG-linked loans and bonds take off
ESG-linked loans are the fastest-growing segment of the corporate credit market. Of the €102 billion issued in Europe during 2019, €35 billion consisted of green loans and €67 billion of other sustainability-linked loans. ESG loans typically include incentives for the borrower to reach ambitious, predetermined sustainability performance targets. ING and Philips, for example, were in 2017 the first to collaborate on revolving credit with the interest rate tied to a company’s sustainability performance.
Credit rating agencies increasingly consider sustainability issues in their assessments, and a growing number of financial institutions are integrating social and environmental impact in risk-return decisions. Some 190 banks and over 3,000 asset owners and managers have adopted United Nations sustainable banking and investing principles.
Find all information and figures on the growing ESG finance market in Bain & Company’s full article.
Text by Christian Graf, Michael Jongeneel and Umberto Monai
Image by Mohamed Hassan / Pixabay