Economic View

On a shifting focus to sustainability in the banking sector

What must banks consider when adapting their organisation and activities to environmental, social and governance (ESG) principles?
JEAN-CHRISTOPHE DURAND: One of the clear signs to assess the level of commitment of any organisation towards sustainability is the appointment of qualified professionals who are responsible for ensuring alignment with ESG principles. This often proves challenging, particularly in the banking sector, where purely financial considerations traditionally take precedence. Today, ESG-related discussions have become the norm in boardrooms, all the way from the strategic level down to specific considerations regarding credit assessment and loan decisions.

DANA BUHEJI: Once the right framework has been put in place, it is possible to foster proactive engagement from the bottom up. Opening the door to participation from all ranks of the organisation generates a sense of ownership, giving rise to new proposals emerging directly from employees. Balancing top-down and bottom-up approaches has been part of NBB’s strategy for ESG adaptation, and it has resulted in a three-year executive roadmap with clear key performance indicators reflective of specific inputs from employees.
In what ways can banks facilitate the adoption of environmentally responsible practices by small and medium-sized enterprises (SMEs)?
DURAND: While green financing is still a relatively new phenomenon in the GCC, the increasing involvement of international banks with large local corporations will drive considerable growth in the market. The sustainability-linked assessment of international financial players that are more experienced than their GCC counterparts is causing companies to expedite adaptation to ESG. In other words, investment in solutions that generate efficiency and reduce a company’s environmental footprint are of prime importance for companies seeking financing. 

However, much is still to be done for SMEs to fully embrace sustainability. Awareness is relatively low, and while SMEs can more easily understand social aspects involved in their activities, such as labour relations, they are still required to work on the means to properly gauge their environmental footprint. The Covid-19 pandemic saw banks working closer with their SME clients, which are more vulnerable to these types of crises. This strengthened trust in a way that will facilitate engagement about sustainability moving forwards.
BUHEJI: Local banks have an important role to play with regard to the integration of green policies by SMEs. The advisory role relationship managers play and the sustainability-related surveys conducted by NBB when discussing financing products with its SME clients help both sides better understand the implications that sustainability has on their processes, operations and strategies. These surveys are also helping credit officers ask better questions, and enabling new ways of factoring in sustainability in loan rates and terms to incentivise ESG adoption. 
How is the perception and management of risks evolving in the banking sector, and what specific considerations have emerged from the integration of ESG considerations?
DURAND: Risks should not inhibit innovation, and as long as they are properly identified and there are ways to mitigate them, a bank should act with confidence. Since 2010 the spectrum of risks has widened well beyond credit to include factors such as cyberthreats and liquidity shocks, which calls for a holistic approach. 
BUHEJI: When comparing sectors, banking in the region has always stood out as an industry with stronger governance practices, and this has been the result of proper regulatory oversight. However, the rising importance of sustainability challenges, particularly those pertaining to environmental issues, calls for cross-sectoral action. This merits the consideration of broader regulations encompassing all industries. In this regard, the authorities are working to embed sustainability-related values across industries and society, which could ultimately lead to far-reaching policies.