We examine the central importance of the environmental, social and governance (ESG) agenda as part of our series on the new reality for banks in a COVID-19 world.

• The importance of ESG has been amplified through COVID-19, with banks having a critically important role to play in providing essential support to customers and businesses as well as protecting their staff.
• COVID-19 has shone a bright spotlight on societal issues – the ‘S’ of ESG. It has heightened the relevance of existing social challenges: access to healthcare, financial security, financial inclusion, and issues of social justice and equality (more recently thrown into the spotlight by the Black Lives Matter protests that have happened across the globe).
• The financial support and forbearance measures that banks have put in place during the pandemic have been a fundamentally important aspect of enabling industries and communities to weather the storm.

Banks will need to step back and think about their relevance and role in society and the economy, going back to their core values and re-orienting and re-balancing what they do accordingly. COVID-19 is also accelerating the shift to stakeholder capitalism and a more comprehensive approach to incorporating ESG as part of decisions regarding both opportunities and risks.

The ‘S’ may have dominated during the height of the COVID-19 pandemic, but the other components remain critically important too. Governance – ethical policies, commitment to diversity, paying a fair share of tax – is key, while the environmental agenda remains one of the defining issues of our time. Prior to the virus, the sustainability agenda saw intense activity, with a rapid growth in climate related and ‘green’ products, services and funds.

As investors and communities take stock of COVID-19, the pandemic is likely to be an accelerator of the environmental agenda, driving demand for financial products that promote and reward sustainable values. After all, climate risk has the potential to be the next COVID-19.

Customers will remember how they were treated during their time of need. That will be a driver of customer loyalty and is why the COVID-19 period could prove to be a make or break time for many institutions. Businesses will also be judged according to how they treated, supported and protected employees.

Truly understanding stakeholder expectations will provide banks with a leading edge advantage they can build on in the future, otherwise those that do not will face a deficit that they will need to work hard to overturn.

They risk the potential for negative reactions from investors, customer defections, increasing proxy battles during AGM season, adverse ratings providers’ assessments, and a rise in the cost of capital. There could be 360° implications.

It cannot be a standalone or separate lens through which things are viewed. It must be integrated holistically from the beginning in how they operate, part of the way interactions with customers are framed and how strategic and commercial activities are assessed.

It is a common misconception that ESG considerations can ‘kill deals’ – in fact, it helps banks understand and price risk. It is very practical and, used in the right way, generates significant commercial value.

COVID-19 has accelerated the momentum and through it ESG issues will increasingly set the bar for how banks are assessed. Review where you are now and where you want to get to. Articulate your ambition and vision. Consult with your stakeholders and bring them on the journey.

Explore how these trends are unfolding in your country using the interactive map below.