It is becoming more and more accepted that a sustainable approach to financing and investing decreases risk and increases financial gain--and chief sustainability officers are at the helm. However, those who bravely take on this role in banks argue that they are first and foremost change agents, and driving a new mindset is everything.
“A sustainability officer is a change agent,” says Francesca Messini, sustainability leader and partner at advisory Deloitte Luxembourg. “Change of attitude, policy, procedure.”
This view has been echoed by others in similar roles. “ Laetitia Hamon, head of sustainable finance at the Luxembourg Stock Exchange, said in an interview with Delano in January 2022.
The CSO is expected to lead the sustainability strategy, act as a change agent to drive mindset shift, and to integrate sustainability into the day-to-day operations of a bank. But what does this mean in practice?
Then and now
Historically, sustainability officers’ closest cousins were corporate social responsibility managers. These roles typically sat close to corporate communications and ensured responsible investments in non-governmental organisations--mainly environmental, says Messini.
A chief sustainability officer is different, she adds. “Environmental and social governance is becoming part of the DNA of an organisation. The CSO is the glue connecting it all together.”
According to a by industry body the European Banking Federation and Deloitte, published on 15 June, 80% of the 28 European banks surveyed have a sustainability officer role. They typically boost the bank’s internal capacity to deliver on sustainability; therefore, CSOs set the strategy, prepare the staff to be able to deliver, and increase the bank’s own level of sustainability.
According to Messini, banks are uniquely able to support companies with robust transition plans. This comes from two drivers: external, such as banking regulation and shareholder demand; and internal, a pressure for the bank to manage sustainability risk, increase sustainability’s impact on business decisions, performance and competitivity, and integrate it into governance, management and business strategies.
And even though the CSO role itself barely existed five years ago, it’s already evolved. “It’s moving away from focusing on the ‘g’ of governance to focus on the ‘e’ and ‘s’ of environmental and social,” says Messini.
Messini gives some practical examples. “For environmental impact, you would go to the bank’s loan portfolio and examine the due diligence of the underlying goods. For the bank itself, you’re looking at the environmental impact of the bank’s building, its business travel planning, its fleet of cars.”
Targeting social impact works in a similar manner. “Again, you’re looking at loans and making sure they give certain communities and demographics access to finance. This might involve applying different criteria from before.”
Up until now, the focus of many chief sustainability officers in banks has been on environmental rather than social. According to the EBF and Deloitte joint report, 79% of the banks surveyed have decided to focus their sustainability strategy on the climate action sustainable development goal, compared to only 7% on social goals such as zero hunger or clean water and sanitisation (11%).
This could be in part because climate action influences and impacts other SDGs, the report noted, or that nearly 50% of euro area banks’ exposure to risk is directly or indirectly linked to climate change.
However, Messini believes this too will change. “I think there will be an evolution towards a greater social focus,” she says. The historic issues with tackling social impact rest on a lack of measurement, the EBF and Deloitte report notes, with more complex elements to track and assess and less robust market data.
With a first draft of the EU Social Taxonomy in place and new EU supply chain due diligence regulation, a framework is emerging. “Social impact can be explored in a business’s supply chain--human rights, working conditions--in a similar way to the environmental impact,” Messini says.
Resources and talent
One of the greatest challenges CSOs face, however, is building a team around them. The novelty of sustainability in the banking sector means that most candidates simply don’t have experience. In fact, fewer than 20% of the EBF and Deloitte’s report respondents held a similar role in the past.
This finding does not surprise Messini. “Resources and talent is a challenge,” she says. “The mix finance and scientific expertise is not linked to standard finance profiles.” Many banking organisations therefore build a team that combines these skills, then invests in upskilling new team members.
The survey uncovered that 72% of sustainability leaders come from their organisation’s business department or have professional expertise in business. Previous posts included head of business development, CEO or head of export finance.
The EBF and Deloitte study points out that this in itself is not a problem, because it shows that banks are tackling sustainability from a business perspective.
However, Messini believes academic and professional expertise will grow--starting with degree courses. “A really positive market trend of the past four to five years is seeing students study sustainable finance. “This even happens at Luxembourg university.”
The University of Luxembourg in 2019 established a sustainable finance project within its department of finance. “As these graduates come up through the banks we’re going to see greater expertise,” says Messini.
Study respondents highlighted the need for more scientific profiles in their team in topics such as biodiversity, water management, or renewable resources. Interviewees also shared the necessary value of having staff educated on the social aspects of ESG, such as human rights and working conditions.
From risk to opportunity
Sustainability is moving from risk to an opportunity to expand products to existing markets or to conquer new ones. The millennial generation is one market highlighted by the survey that has placed values at the heart of its decision making. How can the CSO maximise these opportunities?
“CEO access is fundamental. It must come from the top. The CEO sets the tone,” says Messini. She expects that the shift from risk and compliance to business strategy will see CSOs increasingly form part of the senior leadership team of the organisation alongside the chief financial officer and chief operations officer. “It will improve in importance, taking more decision power,” she says.
She believes that growing regulatory complexity thanks to the fragmented European market means that CSOs will also be the point of interaction and dialogue with authorities. This will also apply to the lack of robust ESG data. Respondents to the EBF and Deloitte survey called for quality data and ESG reporting frameworks in Europe. As the CSO role grows, so will their influence and lobbying power for a uniform data approach.
But Messini’s view on the long-term role of the CSO is surprising. “In the longer term, [the role] could become extinct all together,” she says.
“There were already respondents in the survey who said that they don’t have a CSO because sustainability is already integrated at every level of their organisation.” While the lack of a need for a CSO could be seen as the successful implementation of ESG, Messini believes this will be rare in the short and medium term.
“These respondents were banks that were set up with the purpose of sustainability so that makes sense not to have a single person as CSO. For existing banks, however, the role of CSO is needed to drive that integration.”
For Messini, who came to the position of sustainability leader from a consulting background, what’s the most valuable skill she possesses? “Negotiation. It’s the most important skill,” she says. As big an indicator as any that there is still a lot of work to do to embed ESG into organisations.
This article was published for the Paperjam + Delano Finance newsletter, the weekly source for financial news in Luxembourg..