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The S of ESG
In the past few years the European Commission, European Central Banks and European Banking Authority’s mandates have focused on the Environmental aspect of sustainability. However the Covid 19 crisis has proved that social financing has an important part to play in achieving sustainable development goals, post Covid 19 recovery as well as a more resilient economy. (Figure 1)
This trend is set to continue as part of key instruments supporting the post Covid 19 recovery plan for Europe. In fact, the European Commission will enhance its Invest EU Programme, including a Strategic Investment Facility strong of 15.3 billion complemented by a Capital Markets Union Action Plan aimed at “making the capital markets work for Europe’s recovery”. (Figure 2)
In this context, Banks regulators and supervisors are also increasingly turning to social metrics definitions, disclosures and monitoring. We believe that we can measure the social impact of credit institutions by Scope 1, 2 and 3 (similarly to Green House Gas emissions):
- SCOPE 1: Direct social impact (ex: gender parity in management bodies, treatment of customers and employees, contribution to social employment favourable to disadvantaged populations).
- SCOPE 2: Indirect social impact such as impact of bank’s operations, providers, purchases and consumption (ex: responsible procurement and number of SME’s contractors).
- SCOPE 3: Social impact investments and loans (ex: granting loans to SME’s or contributions to social housing development).
What to expect?
Given the actions undertaken by the European Commission, we can expect the demand for socially responsible investments to grow and ESG including the S disclosures to become a standard. Moreover, the European Banking Authority Pillar III reporting requirements (mandatory from June 2022) will include social considerations (particularly metrics such as eligible pool of social investments in the lending portfolio). The EBA has just published an online survey to receive input from credit institutions on their practices and views in the area of disclosure of information on environmental social governance (ESG) risks.
We help our clients to assess their social performances based on relevant standards and to develop in house metrics. This social metrics can be used to assess bank’s portfolio (Scope 3) or to measure the banks internal social footprint (Scope 1 and 2) . This helps financial institutions to better align with the European Commission objectives and to monitor the bank from a social responsible angle with a forward looking vision (Figure 3)