At governmental and policy level, there is increasing talk about the importance of climate change, and the need to act quickly. There appears to be growing understanding that everyone needs to act. Corporate reporting on environmental, social and governance (ESG) issues has expanded rapidly in the last couple of years, and there is a strong move towards unified standards for reporting at a global level.
I have certainly noticed a change in pace in the last few years. The geopolitical context, and especially the energy crisis, is starting to increase the urgency of the debate. I get the impression that there is growing ambition to organise around corporate social responsibility, to commit more, and to communicate better. This is above and beyond previous reporting requirements, or even new and emerging standards for reporting.
From talk to action
However, is this talk translating into real action or just more reporting? My observation is that action is not necessarily on the cards—and I am not the only one. Hervé Phaure is Risk Advisory Partner at Deloitte France. He agrees that in the financial sector at least, movement is slow.
“The majority of banks are working on ESG issues in the strictest sense of the word. Arrangements have been set up, and momentum is slowly growing. However, the level of staffing and skills, and the relationships between ESG reporting teams and the business lines are more variable.”
There may be an issue about how we measure both the current (baseline) position and action towards targets. As I discuss ESG issues with both clients and consultants, I hear the same issues: there is little usable data, and it doesn’t always cover the most important issues. This makes it hard to find the right indicators to show climate change. Hervé suggests that there is also a question of political will.
“I think there is a lack of ambition and will in some quarters. In the very short term, we could easily come up with some intelligent-looking indicators—but if we don’t know where we are going, or how we want to get there, they won’t make any sense. The real issue is where we need to go, and how we are going to get there.”
A question of timing
Hervé suggests that perhaps the issue is one of timing. He points out that environmental issues have generally been seen as important, but not necessarily urgent. He likens this to retirement.
“We all know that we have to save into a pension to pay for our retirement, but that doesn’t necessarily have the same urgency at 20 years old as when we’re 55, does it? I think climate change is a bit like that. We all knew it was important, but it didn’t immediately seem to affect our generation. Yes, the icecaps are melting, but that was mainly seen as a problem for our grandchildren.”
This summer, however, has changed perspectives on this. The excessive heat made us all realise that perhaps climate change was a more urgent problem than we had previously thought. Hervé suggests that perhaps this has simply exposed a fault in banks’ planning and management.
“There has been a gap in banking for a very long time, about how to manage activities that have long cycles like credit activities, but with short-term indicators. We can see this with problems with credit models that have emerged as interest rates rose, but I don’t see any real action being taken. As long as we are in this paradigm, nothing will change. We need to move from ‘I’m talking about it’ to ‘I’m doing something’.”
‘Doing something’ has often translated into setting ambitious targets, such as reaching net zero carbon by 2050. However, these targets are not always backed up by genuine plans. Hervé highlights a paradox: by defining a target for 20 or 30 years’ time, we are almost telling ourselves that it doesn’t matter now. However, this kind of thinking has a flaw.
“To reach our 30-year target, we need to know where to go in five years or ten years. I think this is the current gap in thinking. Unfortunately, the current horizon of most executives and shareholders is around five or six years, not 20 to 30. The reality is that 30-year targets are a trap. We need to be making firm commitments for five to ten years instead.”
Hervé’s final thoughts to close this discussion with some key recommendations are the following ones:
Banks have to work to redefine their priorities and their offerings by seeking to understand how climate issues will directly impact their customers, and to what extent, beyond the risks alone, these impacts could enable them to set up innovative offers, responding to the structural expectations or transformation challenges of their customers, and at the same time likely to drive profitability for the bank. In summary, to transform these risks into real short-term business opportunities.