Environmental Protection, ESG & Sustainable Finance

Aminul Haque, July 2022

 As scientists sound the alarm bells of climate change ever more loudly, companies are beginning to wake up to the dangers that threaten their businesses and industries, as well as the world at large. Businesses big and small are slowly starting to take responsibility and action, adapting their policies and programmes to protect themselves and, ultimately, the environment. However, a vital yet often overlooked element in this process is the role of money lenders. While banks are rarely the faces of climate initiatives, their at least indirect support of any company’s actions demands that they make investment decisions based on the long-term impact they may have on the planet. But how can this be realised in practice – not just transparently, but also consistently and productively? This article explains why banks must take environmental protection seriously and offers a practical, systematic solution.

It is now widely recognised that large-scale industry is heavily responsible for global warming through its emission of greenhouse gases, especially carbon dioxide, which scientists predict will raise global temperatures by over 2°C in the twenty-first century unless drastic and far-reaching action is taken. While this alone should be more than enough to make companies change direction, the urgency is compounded by a growing realisation that businesses will be the victims, as well as causes, of climate change. Persistent or chronic environmental changes such as storms, flooding and rising sea levels may, for example, force relocation or even closure.

It is therefore vital that major industries across the world take more sustainable decisions and actions to protect the environment, such as developing green policies and programmes that will control and ultimately reduce pollution, rather than create it. One company that is leading the way in this regard is Adidas through its partnership with Parley Ocean Plastic, a range of materials created from intercepted and upcycled marine plastic debris.[1] Since 2015, Adidas has been using these materials to create high-performance ‘Adidas x Parley’ sportswear, with the aim of protecting sea life and reducing pollution in the sea.[2] This has led to 11 million shoes made from ocean plastic in just four years, proving that long-term business success and commitment to the planet do not have to be mutually exclusive.

But where do banks come into this? And how do sustainability analytics and a sustainability credit score system fit in the equation? While they are rarely the face of climate initiatives, they are nonetheless vital links in the chain of action for environmental protection. The fact that banks provide loans to companies in virtually every industry around the world means that, depending on their investment choices, they are major driving forces behind projects that either harm or help the environment. Banks have tremendous responsibility to choose wisely when providing companies with loans, and it is vital that they do so based on the impacts that these companies may have on the future of the planet. They must therefore be encouraged to support initiatives that will be both economically and environmentally sustainable in the long term.

For this to become reality, banks need to be able to access information regarding companies’ attitudes and approaches to environmental protection. The good news is that as climate risks pose ever greater threats to businesses, regulatory practices are already being implemented to some extent, and investors are demanding greater transparency from the businesses they support. The next step, however, is to introduce lenders to sustainable decision-making tools and practices which may be implemented widely for consistency and greater transparency. A small number of companies, such as Moody’s Analytics, are working to help businesses assess environmental and risk exposure in order to strengthen their sustainability. However, there is also need for systems through which banks can then assess businesses’ responses to such information.

The Sona Sustainability Credit Score System (SSCSS) has been designed to judge the sustainability of a business using wider metrics than those currently in use. One of its six indicators is, crucially, environmental protection, meaning that lenders are informed of a company’s policies and practices in this regard. Depending on the assessment, the company is then advised to follow a specific approach and take specific actions, which in addition to protecting the planet will make the company more environmentally creditworthy, thus encouraging both financial and environmental sustainability in tandem.

[1] Parley. ‘Ocean Plastic.’ Parley, n.d. Accessed 21 July 2022. https://www.parley.tv/updates/parley-ocean-plastic.

[2] Adidas. ‘Adidas x Parley: For the Oceans.’ Adidas, n.d. Accessed 7 July 2022. https://www.adidas.co.uk/parley

Keywords: sustainability; risk management; ESG; firm valuation; WACC; sustainable finance; scenarios; sustainability analytics; sustainability credit score system; Sustainable investing; sustainable analytics; analysing sustainability.