There are many ways to manage progress. Usually, most people choose to measure performance, set high goals, and seek benefits.
Yet what usually changes real market is not pursuit, goals and profits; what changes time and circumstances is that risks evolve and transform and, if not addressed properly, can become uncontrollable and catastrophic.
Today, we are becoming more and more aware that we are facing new risks as banking system is called upon to manage a new multidimensional form of these, that of ESG. Risks arising from the impact of financial and investment choices on the environment, society and the quality of corporate governance (Environment, Society, Governance – ESG); these are required to be identified, analyzed, monitored and managed effectively as the form and extent of financial market risk change.
Banks’ main object over time is the management of a variety of risks but this time things seem to be different. Risks do not only concern customers’ creditworthiness (and its evolution) but also of banking organizations themselves. And these risks are not solely arising from the business of their customers, the economy and markets but climate change, state of environment, supervision authorities’ priorities, adoption of optimal corporate governance principles (such as diversity and stakeholders in corporate environment, customers, local community) and corporate social responsibility.
Never before have banks been required to adapt to such a wide and compelling set of risks. Nowadays peculiarity is that they have to adapt their operation to the new conditions but, at the same time, they have to monitor respective adaptation and compliance of their customers to these.
According to a recent report by the European Investment Bank (EIB) (European Enterprises and Climate Change 2020/2021), only 18% of Greek companies have invested in anti-climate change measures, which is far from the European average (45%), and unfortunately, at the moment, it ranks Greece in the last position among the member states of the European Union.
Indicative of environment’s low hierarchy for companies in Greece is that a very small percentage of those invest in measures to improve energy efficiency, despite the fact that such investments result in multiple economic and environmental benefits.
In essence, banks need to contribute to the “retraining” of these businesses, which are being funded by banks, in order to reap the benefits of reducing carbon dioxide emissions, mitigating the effects of climate change, saving energy and thus reducing costs and securing energy supply.
However, we must admit that challenges do not only concern Greek banks but the eurozone banking institutions, insurance companies and investment institutions as a whole. All of these face a host of financial as well as physical risks arising from the environmental crisis. And while the investment interest in sustainable and green financing is stronger than ever, new unfair practices are being developed at the same time, such as misleading consumers with products that claim to be “environmentally friendly” without being worthy of our attention.
Greek banks have adopted the need to deal with new challenges. However, we need an immediate implementation plan to evaluate issues but also to fill any information gaps and data, which are many, as we now have to record and utilize data on issues that were far from traditional banking interest. Banks now need to strengthen their ability to record, measure and assess risks related to environmental crisis. To “measure” the direct or indirect emissions of greenhouse gases, to set targets for reducing gas emissions in the near future. Be aware of the factors that can cause damage to clients they have financed or to their facilities that are exposed to environmental risks. Methodologies, models and standards are needed to incorporate new supervisory requirements. And because these methods will be international, we must monitor and follow developments closely.
In fact, banking will soon be very different from what we were used to in the past. With new priorities, with a different perception in dealing with risks, which have been undertaken, with greater responsibility for what is happening in society but also with more intensive international cooperation. The risks that financial institutions are required to manage are no longer limited by national borders. This is, after all, an additional dimension of environmental crisis we are experiencing, as it presupposes closer global cooperation to tackle it comprehensively and adequately.
*Mr. Ilias E. Xirouhakis is the Chief Executive Officer at Hellenic Financial Stability Fund