It became a modern trend in the financial sector that each organization likes to provide sophisticated wordings about the importance of sustainable finance and the application of Environmental, Social, and Governance (ESG) criteria in their day-to-day business and asset allocation.
Above all big banks and financial institutions heavily publish about their high ESG scores and their great activities in the environmental sector, the “E” in the ESG criteria.
During the past months, we learned that the very same banks just keep telling us that they do not see any responsibility at all for having facilitated the flow of the stolen life savings of hundreds and thousands of victims of cyberfraud. Any requests for help from the victims are just ignored or rejected.
So obviously and unfortunately – although heavily advertized – the “S” for Social and “G” for Governance criteria application in the day to day business and in asset allocation is still in a quite early stage in the financial industry.
The Who Cares Wins Initiative!
In 2004 the UN Secretay General and UN Global Compact set up The Who Cares Wins (WCW) Initiative. The Initiative aimed to increase the financial industry´s understanding of existing Environmental, Social, and Compliance (ESG) risks and opportunities, and to improve the integration of ESG criteria into the investment decision-making process.
According to Investopedia, ESG criteria are a set of standards that socially conscious investors use to screen potential investments.
- Environmental criteria consider how a company performs as a steward of nature.
- Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities, where it operates.
- Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.
Applying ESG criteria in the investment allocation process and portfolio management process means supporting the growth of sustainable capital flows and is supposed to result in a better world.
ESG ratings are overriding the importance of credit ratings
Global sustainable investing has gained very significant traction in recent years, with an estimated total value of assets following sustainable investing strategies at EUR 37 trillion in 2019, including more than EUR 2.3 trillion in institutional assets tracking ESG ratings and assessments.
Market participants are eager to take ESG factors into account in their investment decisions and risk management decisions. Therefore, there is an increasing demand for assessments that provide insights into an entity´s ESG profile.
Financial institutions publish sustainable finance frameworks and list the number of trees planted on their websites. They try to convince the society as well as their shareholders, that their ESG profile – as defined by themselves and by numerous different ESG frameworks out there – is just great.
Issues with non – transparent ESG profiles and ESG ratings
In general, the evident issue with the ESG profiles and ESG ratings is that there is a lack of legally binding definition and comparability among providers of ESG ratings or legal requirements to ensure transparency of underlying methodologies of such ratings.
The increasing demand for assessments that provide insights on an entity´s ESG profile should go hand in hand with safeguards. Safeguards, that ensure that the information referred to is robust and that the assessments are reliable to prevent the risk of misstatements (for example green-washing).
What about the S + G in ESG?
In addition, the most reliable and accepted qualitative and quantitative indicators, metrics, and methods for ESG ratings are currently available to institutions for the assessment of environmental risks. The regulatory authorities, as well as the institutions, give particular prominence to environmental risk. Such advanced qualitative and quantitative indicators for S + G are still missing and there is the only minor discussion about the requirements of such S+G criteria.
Maybe this is the reason why no or only minor public discussions are about how to account in ESG profiles for the massive cooperation of the institutions like Deutsche Bank, ING, ABN AMRO with criminal organizations by laundering billions of dirty money over many years.
So in specific no announcement on the HSBC´s website details how the bank´s governance score on its ESG profile was affected by the enormous and increasing money-laundering fines over the past years.
We think the whole efforts about qualitative and quantitative, metrics and methods for ESG profiles are missing the “G” ….and not even to mention the “S”.
Shareholder´s money is fuelling the crime industry!
Criminals need the incumbent financial system to get hold of their illegal proceeds. Even if crypto is involved, the financial system is necessary to cash out the stolen money.
The involvement of willfully cooperating banks and/or acquirers is key for the criminals to successfully rip off people, do drug deals, and sell weapons. The economic and political influence of criminal organizations weakens the social fabric, collective ethical standards, and ultimately the democratic institutions of society.
ING, HSBC, and Deutsche Bank are public companies. Are the asset managers of the big investment companies aware that these companies support criminals to do their business when investing in shares of these companies, although HSBC, ING, and DEUTSCHE BANK pretend to have a great ESG score?
So we think it is about time to start to take a deeper look at how banks and financial institutions deal with the S and G criteria in the ESG scores.