Environmental, social, and governance (ESG) is the new digital transformation, but it remains highly problematic from a strategy and execution perspective. In the context of bank financing, institutions can have very different starting points, with portfolios exposed to various risks, making it difficult to determine a baseline for success.

Listed below are the key macroeconomic trends impacting the ESG performance, as identified by GlobalData.

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Growing evidence that ESG makes money

There is growing evidence that environmental impact, diversity, and privacy are key drivers of financial performance at the wealth, corporate, and retail levels. As one indicator, the average ethical fund eclipsed the average non-ethical fund between 2017 and 2020 in terms of growth (30.4% vs. 29.1%) and between 2015 and 2020 (76.1% vs. 64.1%).

Further, the interdependency between a bank’s profitability and the environmental record of its clients has become increasingly clear. For example, US energy giant PG&E filed for bankruptcy in 2019 as it couldn’t meet the liabilities it faced following the Californian wildfires.

Reputational building

Banking has a particularly high need for reputational rehabilitation after the Great Recession. ESG initiatives are a potential way to atone, by doing demonstrable good for local communities, employees, customers, and the environment. This contrasts with skin-deep marketing campaigns and greenwashing.

Generation Hashtag

A large driver of sustainability is a generation that will soon represent 75% of all accounts and purchases and receive an estimated $30tn wealth transfer from baby boomers over the next 30 years.

Younger customers place increased weight on a company’s moral, social, and political views, and choose to affiliate with those that share their values. This creates an opportunity for financial institutions to win more customers than they lose by taking a stand on popular issues.

Several purpose-driven banking organisations, like building societies or credit unions, often enjoy above-average financial returns and net promoter scores (NPS). However, white space exists for traditional financial service institutions in this regard.

This is an edited extract from the ESG – Top Trends by Sector – Thematic Research report produced by GlobalData Thematic Research.