EXCLUSIVE: “The activist bank?” – Martin Richards, HSBC; Clinton Abbott, SunTec and Alex Garkov, EcoVadis in ‘The Fintech Magazine’

Short of turning off funding for fossil fuels tomorrow, Martin Richards from HSBC, Clinton Abbott of SunTec and Alex Garkov at EcoVadis explore how banks can effect positive change in the global economy

“The world’s economy is going to get restructured as we get closer to net zero and all banks have to be involved in this.”

That’s the clarion call of HSBC’s Martin Richards, and underlines the huge ambition – and change – they must embrace.With their continued investment in fossil fuels and other non-sustainable sectors, banks are regularly attacked for both perceived and real failures in switching to greener, more ethical investments. HSBC itself has been a high-profile target. But regulators, activists and stakeholders are all nudging them in the same direction.

And with mounting evidence that an ethical business is also a more profitable one, there’s a commercial incentive for banks to flex that moral muscle faster. In its annual report in January, HSBC (then just emerging from a bruising sequence of events that dismayed investors and activists alike) identified ‘greenwashing’ as a corporate risk that might hinder its own and other banks’ access to capital markets. It had already followed Lloyds, another of the Big Four UK high street banks, in deciding to stop direct financing of, and offering advisory services to, new oil, gas and metallurgical coal projects. Given that HSBC was one of the world’s biggest fossil fuel funders, that move in 2022 was widely seen as a signal that other financiers would find difficult to ignore.

Together, banks are, potentially, the single most influential force in the fight against climate change and for social justice – but not just because of their heft in the markets. Through routine lending decisions and their daily business client relationships, they have the power to alter the economics of corporate value.

The good news is that, according to a report published by EcoVadis and analysts Bain & Co in April on how ESG activities impacted the financial performance of 100,000 businesses, the more environmentally and socially responsible are usually also the more profitable.Not only did it find that ESG activities reduced carbon emissions, but also the companies that embraced them tended to have more diverse leadership and talent, the net result of which was higher profitability and revenue growth, customer satisfaction, and employee satisfaction. However, it noted a big gap between the achievements of listed and non-listed companies, evidenced in the EcoVadis ratings they received.

It’s among the latter that Richards believes there’s a particular opportunity for banks to do more. “Large, listed companies have sophisticated plans to reduce their carbon footprint over time, whereas some of the small and middle-sized companies are just beginning on that journey,” he says.

It’s a more holistic, qualitative way to help companies enhance, improve, and change their policies, which can have a real impact on the way that they are acting in the market

Alex Garkov, EcoVadis

“But most SMEs will sell to larger companies, and they’re going to be in the supply chain of larger, public-listed firms. Those listed companies are not only addressing their scope 1 and scope 2 [direct] emissions, they’re also looking at scope 3 [their supply chain], so small businesses have to decrease their carbon footprint not just for themselves but also so they can participate in the supply chain.

“That means, even if regulation hasn’t come to smaller firms yet, buyers will be bringing that regulation to them, and it’s something they need to focus on, even at the very smallest end of the market.”

Put simply, banks can provide two types of green corporate funding, says Richards. One is loans for businesses of all types and sizes to purchase and execute on their sustainability strategies, such as clean power, transportation and lower waste. The other is financing for climate tech companies, which could be early-stage venture debt financing or infrastructure financing for large projects.

But what’s important with any of these endeavours is transparency, so everyone can be confident about a business’s ESG intentions and performance, and everyone can avoid allegations of greenwashing.This is where an ESG ratings business such as Paris-based EcoVadis comes in. Alex Garkov is a sustainable finance account executive for the firm.

He says: “Most ESG ratings providers in financial services are focussed more on the larger corporates, the listed companies, and they’re usually using publicly-available information to produce their ratings, which they then sell as a dataset.”

At EcoVadis we’re focussed more on smaller businesses, and we work to produce our ratings by engaging with the companies directly to get access to their internal information and systems. This produces what we hope is an accurate rating, or indicator, of their ESG management and ESG performance over time.

“There’s a huge range of ESG ratings and there’s not a lot of standardisation within the industry,” he admits. “But there’s certainly a role to play for different types of ratings, especially when it comes

to the risk of greenwashing. Because usually, the ratings providers are assessing a company independently, with no conflicts of interest. “That’s the role I see ESG ratings playing in financial services; providing third-party verification of a company’s performance.”

At a macro level, focus has rested on specific, standardised KPIs for ESG, such as the EU’s Sustainable Finance Disclosure Regulation for investors that comes into force this year. EcoVadis’s focus on the micro level means it can go further than simply rate a business – it can provide advice to improve their and others’ performance.

“It’s a more holistic, qualitative way to help companies enhance, improve, and change their policies, to have a real impact on the way that they act in the market,” Garkov says.

No bank or business can improve its ESG credentials if it fails to measure its performance – although, surprisingly, a recent Mobiquity survey among 300 banks revealed that nearly half were failing to measure ESG performance against their own sustainability targets.

Crucially, Garkov points out, there should be no good or bad rating at the start, adding ‘the idea is simply to provide that transparency, as a baseline, to then benchmark performance in the future’.

Once a reliably transparent system of ESG measurement is in place, directors can determine whether their policies are being delivered at the coal face. And, given that ESG targets go further than a business’s own performance, directors can also assess the performance of partners and potential partners within their ecosystem and fulfilment chain.

UNDERSTANDING THE TASK

SunTec is a business solutions company that works with EcoVadis, providing banks like HSBC with pricing and revenue management solutions that include carbon calculators and offsetting programs. Clinton Abbott, a senior vice president with the company, based in South Africa, says that data recording by banks is essential to drive change throughout the supply chain. In Africa, development finance institutions (DFI) have demanded improvements in the reporting standards of African banks, which has made them quantify their own ESG performance.

“There has been a very strong driver towards not only the environmental component of ESG, but also the social and governance elements,” he says. “But how do banks take the deliverables, from a board perspective, all the way down to a portfolio perspective? That’s the question.

“If you look at the products that need to be offered, the loan opportunities and credit lines that need to be supplied, how do you make sure that those loans are al-located to the right people?

“Banks have always had a strong focus on credit risk but they haven’t worked to understand a client’s back-end operations before. How does their whole governance structure work? Are they doing the right thing? Do they run their company in the right manner? Ratings agencies, such as EcoVadis, can provide the transparency that helps a bank to better understand their customers. Examining the non-financial aspect means that, rather than simply relying on an industry sector code, as most banks do, they can truly understand what the organisation does. That allows banks to de-risk their portfolio.”

“It’s both a race to deploy existing technologies as fast as possible and to innovate new technologies as fast as possible… and then not take as long as we did in getting solar and wind out there”

Martin Richards, HSBC

As one of the world’s biggest banks, HSBC has a target of achieving net zero in its own operations and supply chain by 2030, and in its financing portfolio by 2050. It is two years into a five-year Climate Solutions Partnership with the World Resources Institute and WWF, which will see the bank invest $100million to scale up climate innovation ventures and fund nature-based solutions.

Advice and mentoring are very much part of HSBC’s overall strategy to reach net zero, says Richards, alongside the provision of funding. He says: “There’s our existing portfolio of over 1.3 million companies that we’re working with to transition to a net-zero future. Smaller enterprises typically don’t have huge teams to help them decarbonise so we’re taking best practices from our largest clients to our smaller clients, where it’s appropriate and industry significant.

“And, as those larger global companies try to decarbonise, we’re taking our climate tech companies, that have new technologies addressing hard-to-abate sectors, and introducing their technology to them. That helps the climate techs scale and the large companies to transition.”

Richards says HSBC is focussed on financing the development of sustainable, scalable infrastructure such as wind farms, green batteries and utility scale solar.

“For the early-stage technologies, such as direct air capture or green hydrogen, there are a lot of lab-proven technologies that need to make commercial scale,” he says. “And we’re seeing a lot of capital being deployed in a blended structure, where you may have a venture capital company coming in, with a bank on top; you may have a government giving a grant, or a guarantee with debt financing on top.

“It’s both a race to deploy existing technologies as fast as possible and innovate new technologies as fast as possible… and then not take as long as we did in getting solar and wind out there.“For our other companies, the non-climate tech companies, we want to finance

firms that, for example, don’t have enough capital to electrify their transport fleet, but where, over the life of the fleet, it would make economic sense for them to switch. “With the evolution of technology and the cost curve, you can buy an electric car, or put a heat pump in place, and that would not only be good for the planet but also be good for your business, economically.”

WHAT’S IN IT FOR ME?

As banks seek to encourage ESG spending there has been the emergence of products with incentives that reward the customer. Since banks will be increasingly rated on the sustainability of their portfolios it’s a trend we’ll see grow with ever more imaginative carrots to go green, says Abbott.

“Take the example of a loan facility a bank puts down. Instead of looking at just the pay-off facility, the bank could offer an interest rate discount if the customer meets certain objectives,” he says.

“It’s possible to make sure the customer and the bank are aligned, and everybody walks away with benefits “

Clinton Abbott, SunTec

“So, if the customer reduces their carbon component over the next year by putting solar financing into their organisation, they get a two per cent reduction on the interest component. If they meet X, Y, and Z additional criteria, say they make $100,000 of payments through other mechanisms to meet zero-emission goals, they get a discount on that pricing, or they could be given a 50 per cent discount on Swift transfers, for instance.

“Because of digitisation, all of this is managed automatically – and there are tracking mechanisms happening in real-time now – it’s clear if a customer has met their targets. So, it’s possible to make sure the customer and the

bank are aligned, and everybody walks away with benefits.“ Abbott says banks have an opportunity to drive ESG by understanding their customers’ supply chains and resulting value chains. But they can go further than using their own financial products to incentivise and meet clients’ needs by sharing knowledge, building networks and, ultimately, ESG-focussed ecosystems.

“A customer may benefit from using solar power because there are tax benefits for using it, as well funding benefits, and banks can assist customers to work better with that,“ he explains. “At the same time, because, as a bank, you have the insights into that customer, you can start expanding to build an ecosystem between customers.

The bank can give discount pricing, or free transactions, while growing that ecosystem and uplifting their own portfolio.”Abbott, Richards and Garkov stress that joining the dots with effective ESG measurements, working together in ecosystems and gearing finance to incentivise ESG goals will be a key path to reaching net zero and meeting the world’s commitment to contain global warming to 1.5°C.Richards says: “

Between here and there, every company, every bank, and every country is going to have to do more and it’s a huge opportunity.”Realising it, however, goes beyond ratings, says Abbott. “I think the more people talk about it, the more it becomes not just a nice ESG logo but something tangible.

“When you can physically see the difference you’re making as an individual, then you know you’re making a difference as an organisation.

“It’s not necessarily a dollars and pounds measure, rather it’s an acceptance that we all need to make a difference.

This article was published in The Fintech Magazine Issue 28, Page 58-60