Lenders are under pressure to consider their environmental, social and governance (ESG) impact.
Follow these simple steps to embrace ESG and drive sustainable lending.
DEMYSTIFYING ESG
IN LENDING
Tip Sheet
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EMBRACE ESG IN LENDING
FIS® gives you an efficient framework for incorporating ESG principles into your
end-to-end lending process. Get in touch to learn more.
For truly sustainable lending, you must enrich your KYC process to include screening prospective and existing customers on their ESG credentials.
Whether firms participate routinely in controversial activities—from fossil fuel production to violent video games—or hit headlines for illegal practices like tax evasion or negative environmental and social practices, a weighted scoring framework should help you assess the scale and severity of the issues and the potential impact on credit ratings and lending decisions.
DO YOUR DUE DILIGENCE
Increasingly, you should be aiming to fund projects that have a positive ESG impact. These could be linked directly to green or social projects through green/social loans or to generally improving a company’s sustainability profile through sustainability-linked loans.
For sustainability-linked loans, you’ll need to start setting ambitious but achievable targets for ESG related KPIs. And while customers must show they’re keeping their side of the bargain – with penalties if they aren’t – there should be exit provisions if they need to revert to a standard contract.
PRIORITIZE SUSTAINABLE LOANS
On top of your direct green, social and ESG-linked loan portfolio, you should assess what part of your standard loan and investment book can be considered green or sustainable.
There are likely to be local regulatory rules to follow here. In the EU and U.K., lenders will need to assess each economic activity of their clients to judge what portion of their business gets the green tag.
In simple terms, that means making sure the economic activities of the clients meets at least one of six environmental objectives, does no harm to the other five, has no negative social impacts and the company does not show any negative news on ESG. Less simply, you need to read 1,600 pages of technical documentation for the details to do it right.
STICK TO THE RULES
A number of credit rating agencies and market data providers, have developed their own ESG scoring systems. But a lack of consistency between them means that current ESG ratings can vary much more than traditional credit ratings.
With different methodologies using divergent metrics, the World Economic Forum has joined forces with major audit firms to develop a new single framework for measuring sustainability, based on 55 KPIs.
This should give you a good starting point to determine what data to collect from your clients. As most of the lending book is towards private companies, their ESG data is not usually available from the big market data providers.
WEIGH UP ESG SCORES
As well as monitoring, classifying and scoring borrowers, your lending organization will need to disclose its own ESG impact and risks to its overall sustainability.
ESG disclosures should cover your strategy for achieving net-zero carbon emissions and the physical and transition risks that climate change presents to your firm and the risk in your balance sheet. But already, the European Central Bank has accused the 109 lenders under its supervision of failing to meet its disclosure expectations.
REPORT YOUR OWN RISKS
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1 https://www.ft.com/content/aaa06d90-0356-44b4-b637-0e47c9003ba4
Improve awareness
Monitor the market
Set the context
Compare methods
Ensure rapid response