In an era defined by global climate shifts and geopolitical challenges, the role of banks in fostering sustainability has become increasingly critical. Central to this endeavour is the practice of transparent reporting and disclosure of ESG factors, which forms the bedrock upon which sustainable banking rests and serves as a catalyst for enhanced credibility. When banks disclose their ESG performance and objectives and commit to responsible business practices, they establish a robust system of accountability, building trust among stakeholders and paving the way for sustainable development and economic resilience, which is the ultimate embodiment of corporate responsibility.
As environmental and social considerations increasingly shape investment choices, ESG disclosures have emerged as a fundamental form of public reporting by banks. These disclosures illuminate a multitude of ESG issues, encompassing greenhouse gas emissions, water use, human rights, diversity, ethics, sustainable finance and governance practices. Regulators worldwide are increasingly recognising the profound significance of ESG factors in assessing risks and opportunities for financial institutions.
Building bridges to enhanced risk management and investors’ trust
Effective ESG reporting transcends mere accountability; it serves as a proactive risk management tool. Banks that champion transparent disclosure gain invaluable insights into their environmental and social impacts. Armed with this knowledge, they can proactively identify and mitigate potential ESG risks, thus fostering resilience in an ever-evolving landscape. By assessing both risks and opportunities, financial institutions can better position themselves in a world characterised by unprecedented change.
Mashreq has adeptly embraced comprehensive ESG reporting frameworks, including GRI, SASB, and regulatory reporting requirements like DFM ESG guidelines. Notably, the bank’s sustainability reporting undergoes rigorous third-party assurance, aligning with AA1000AS standards.
In a world where investors increasingly prioritise ESG factors in their decision-making, transparent reporting also plays a pivotal role in bolstering investor confidence and driving sustainable investment. As stakeholders magnify their focus on ESG considerations, banks that provide exhaustive information on these factors are equipped with significant competitive advantage to navigate the shifting investment landscape and attract investors’ interest and trust.
This paradigm shift toward sustainable investment is not a fleeting trend; it signifies a global movement. Investors are seeking alignment between their values and portfolios, placing banks at the forefront of this transition.
Comprehensive ESG reporting exemplifies responsible banking practices, signalling to investors that the banks not only have strong risk assessment capabilities but also comprehensive risk management strategies. Our perspective on the role of disclosure in fostering accountability and trust is unequivocal: ESG disclosures are not a public relations gimmick; they are the lifeblood of responsible banking. These disclosures serve as vital instruments for diverse stakeholders, including investors, regulators, consumers, and more. They seek to understand how banks manage ESG risks and contribute to sustainable value creation.
Making a difference through fit-for-purpose ESG financial offerings
In the ever-changing landscape of global finance, where economic decisions can ripple through societies and ecosystems, it is imperative for banks to stay vigilant. They must not only ensure profitability but also maintain a resolute focus on the broader consequences of their financing activities. Banks in the region are becoming increasingly aware of their crucial role in driving the transition toward sustainable and low-carbon growth by directing financial flows toward sustainable, climate-friendly, bankable projects and offerings.
The most significant societal impact arises from the financial services and products that banks provide and the customers, companies, and activities they finance. Consequently, banks should place a strong emphasis on addressing the indirect impact generated by their financing and investing activities. To this end, Mashreq is currently developing its Sustainable Financing Framework, aimed at facilitating the issuance of green, social, or sustainability instruments collectively known as Sustainable Finance Instruments.
This framework enables the bank to continuously engage with stakeholders, showcase progress in developing a sustainable portfolio, integrate ESG criteria into lending and investment processes, and refine its understanding and integration of sustainability throughout its organisational fabric.
Sustainability-linked financing is gaining prominence, with organisations like Bapco Energies (previously known as nogaholding), in collaboration with Mashreq and Gulf International Bank B.S.C., leading the way with the largest sustainability-linked loan (SLL) in the region’s history. SLL serves as a solution to engage stakeholders while achieving transition and sustainability goals.
Similar to traditional corporate loans, SLLs distinguish themselves through a unique feature — the borrower’s interest rates are intrinsically linked to selected sustainability performance indicators (SPTs) and related key performance indicators (KPIs).
These indicators encompass critical metrics, such as reductions in carbon emissions. Companies that successfully achieve their sustainability targets under the SLL framework are rewarded with favourable interest rates. Conversely, a failure to meet these targets results in higher interest rates. SLLs incentivise companies to harmonise their financing and sustainability objectives, fostering a synergy that propels sustainable banking practices forward.
Sustainable banking practices are not merely a choice; they represent an imperative in our ever-evolving world. In the years to come, transparent reporting, proactive risk management, and responsible investment will become the cornerstones of a sustainable banking ecosystem. As financial institutions worldwide embark on their sustainable banking journeys, a commitment to accountability, trust, and sustainability will drive their transformation.
By embracing these principles, banks can effectively steer the transition towards a greener and more socially responsible financial landscape. This proactive approach ensures not only their own resilience but also their pivotal role in shaping a sustainable and prosperous future for all.
— The writer is Senior Executive Vice President, Group Head of International Banking, Mashreq