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Banks must act now to capture ESG opportunities

By Aurelien Vincent and Andrew McDowell

Article

One of the megatrends that will shape business over the next decade is environment, sustainability, and governance (ESG). It will force businesses across industries to drastically transform their operating models, perhaps even shifting to net zero emissions in coming decades. This transition will require massive investments, creating enormous opportunities for banks. However, it also presents significant risks to banks’ current business portfolios.

ESG is not new, but it has become a priority for business leaders. This change in attitude is a result of greater awareness of climate change, social inequality and the impact of COVID-19—all amplified through social media.[i] According to a 2021 PwC survey conducted in Brazil, Germany, India, the U.K., and the U.S., 80% of consumers, 83% of employees, and 92% of business leaders believe companies that commit to ESG policies will outlast competitors that do not. A further 87% of business leaders said that improving ESG performance is one of their organization’s core strategic objectives.

While banks in the Middle East are generally behind Europe on ESG issues, the dynamics in the region are changing. For example, from 2019 to 2020 there was a 50% increase in green and sustainable bond issuances in the Middle East. Saudi Electricity Company (SEC) raised the first green sukuk (Islamic law compliant bond) from Saudi Arabia in international markets. The Dubai Financial Market launched its first ESG index. Egypt has sold $750 million in green bonds. Moreover, a third of GCC banks now publish a sustainability or ESG report, versus none five years ago.

These developments are encouraging, but it is important that GCC banks accelerate the pace of their ESG initiatives. The risks and opportunities related to ESG for GCC banks are substantial given the region’s economic reliance on fossil fuels and the resulting exposure of GCC banks. GCC governments have already launched initiatives to diversify economies, a move that will only grow more urgent.

As a result, merely reporting on ESG is not enough. GCC banks must move to embed ESG as part of their business strategy and create the necessary structural changes in their operating models to pursue these new strategies. Indeed, as ESG becomes increasingly prominent in the Middle East, and given the pace of ESG adoption in other regions, it is crucial that GCC banks take action to remain competitive and ahead of stakeholders’ expectations. Lagging behind could mean a loss of business and possibly less foreign investment.

By integrating ESG into their business strategy, GCC banks can avoid value destruction and capture incremental value. They can attract new customers, sell new products, reduce operating costs, and better manage risks. While challenging, the business case is positive. To embed ESG into a winning business strategy, we have developed a four-point, ESG plan for GCC banks:

Identify material ESG factors

First, identify the ESG factors that are material to the bank’s business model. For example, corporate lenders should be more concerned about climate than providers of personal banking services, for whom social and financial inclusion may represent a much greater ESG risk and opportunity. Banks should understand the preferences of their different key stakeholders and their sensibilities to different initiatives.

Do not rely on perceptions of value

Second, do not rely on perceptions of value. Quantify the economic impact that the ESG initiatives under consideration will actually generate, and then develop a strategy based on the best combination to avoid resource-consuming initiatives and achieve high returns. Banks should then set ESG targets that reflects their ambition level. Expertise is critical for developing accurate and relevant economic estimates, and to understand how much consumers will value a good ESG image.

Develop an integrated strategy

Third, develop an integrated strategy, embedding ESG opportunities into the overall business strategy and operating model. Banks should identify and prioritize the changes they need make to the business and operating model to capture the most promising ESG and business opportunities.

Develop a roadmap for each initiative

Fourth, banks should develop a roadmap for each initiative (priority, timelines, owners, etc.), and align with management on the implementation plan. Banks will need to be pragmatic. Some initiatives will have a short-term focus (e.g., those driven by regulatory timelines), while others may require a multi-year, phased approach. Throughout the process, banks need to communicate with stakeholders and update them on a timely basis.

The GCC is accelerating its economic diversification. As it does so, its banks have an opportunity to take the lead in promoting positive impact on society and the environment, while improving their bottom lines.

This article originally appeared in Arabian Business, November 2021.

About the authors

Aurelien Vincent is a partner at Strategy& Middle East, part of the PwC network, and Andrew McDowell is a partner at Strategy& Luxembourg, part of the PwC network.

Contact us

Aurelien Vincent

Aurelien Vincent

Partner, Strategy& Middle East

Andrew McDowell

Andrew McDowell

Partner, Strategy& Luxembourg

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