Environmental, social, and governance (ESG)-related mentions in banking and payments company filings grew by 39% in the first quarter of 2022 and the fourth quarter of 2021, according to GlobalData. Some of the positive ESG actions taken by companies included partnerships to enhance financial literacy and offering learning tools to communities, working on the Net Zero Banking Alliance (NZBA) goal to support the transition to a lower carbon economy, and improving the resilience of supply chains and managing working capital requirements with the help of new financing methods.      

Listed below are the key macroeconomic trends impacting ESG performance in the banking and payments sector, as identified by GlobalData.

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 could not meet the liabilities it faced following the Californian wildfires.

Reputation 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 and ESG

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 significance 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). But white space exists for traditional financial service institutions in this regard.

This is an edited extract from the ESG (Environmental, Social, and Governance) Top Trends by Sector – Thematic Research report produced by GlobalData Thematic Research.