How to build a sustainable bank

The ESG sector has a new buzzword: climate-quitting.

In a recent survey, KPMG UK found that environmental, social and governance factors are influencing where UK office workers want to work. Some 20% said they had turned down a job because the company’s ESG commitments were not in line with their values, a number that rose to one in three for 18- to 24-year-olds.

As companies look for ways to turn sustainability commitments into action, finding and keeping the right talent and expertise is a big part of the challenge.

Another one is determining what ESG ‘expertise’ should look like in a financial context.

KPMG has also just announced the launch of its ESG expert training programme for auditors and consultants across Europe, Middle East and Africa, in partnership with EBS Universität in Germany.

“Upon successful completion of the certificate programme, KPMG colleagues will be accredited with the title ‘ESG Expert (EBS)’, awarded by EBS University,” the press release states.

What can banks do to make sure that they attract and keep such experts?

Adopting the principles of responsible investment can mean a fundamental reorganization of how a bank is run. From team structures to executive board appointments, the demands of sustainability have affected not only how business is done but operational structure and governance too.

There is no one-size-fits-all approach to building a sustainable bank. There is, however, a common challenge in most banks’ sustainability journey: creating and filling leadership roles.

To be successful in implementing ESG strategies, financial institutions have had to rewire some of their decision-making structures to align with a new set of targets. In most cases, that means hiring a chief sustainability officer (CSO) or equivalent, a role that embodies group-level commitments to sustainability.

The CSO must demonstrate expertise in how the organization works and its business priorities, and must also have a granular understanding of sustainability, so it is no surprise that the talent pool for this kind of role is relatively shallow.

Sometimes it is best to design the role with a candidate in mind. Research from Deloitte found that 80% of surveyed CSOs were recruited internally, and 82% were headhunted for the role. When the appointment isn’t internal, banks often poach from one another.

Deloitte's report lists some of the conditions that prompt an organization to appoint a CSO, a way for banks eager to demonstrate that their ESG strategy goes all the way to the board.

Firms usually hire for three reasons, Deloitte says: because the external ESG environment is evolving more quickly than it is within the organization; when external stakeholder scrutiny intensifies; and/or when the firm acknowledges that ESG risks are substantial and strategic.

Crédit Agricole has long prided itself in being one of Europe’s greenest banks, and the links between the executive board and each of the group’s business lines are a defining operational feature. It has built a decentralized ESG team that cuts across all silos.

Crédit Agricole CIB is well known for being a green bond powerhouse. Its sustainability journey started in 2003 with the launch of the Equator Principles to assess the environmental and social risks from corporate financing for project construction and expansion.

Back in the Crédit Lyonnais days, the bank’s chief executive worked with Eric Cochard to establish a strategy.

Cochard is now head of sustainable development at CACIB but back then led project financing in metals and mining.

Eric Campos, CredAg’s director of the societal project and managing director of Crédit Agricole transitions and energies, says: “Our model is decentralized, but these big themes within sustainable development are treated in unison. We are constantly liaising and working side by side.”

Pushing for synergy across financial services groups is a common aim.

At UniCredit, the desire to embed the sustainability strategy across the organization was part of the impetus for a board restructuring.

Fiona Melrose, head of group strategy and ESG at the firm, says: “A new executive committee was formed May 2021, and the CEO office was set up to incorporate the topics that are closest to the executive strategy, including ESG.”

For Melrose, this ambition goes beyond sustainability.

“As a bank, we push for simplification in working together as a group,” she says. "We have the advantage of doing things at scale, while at the same time being embedded in the communities via our local banks."

In corporate and investment banking, the reality of any sustainability strategy is measured in capital allocation, so the role of the sustainable finance lead is in the spotlight.

“The rise of the CSO in banking is a really interesting question,” says Barclays’ new global head of sustainable finance, Daniel Hanna. "The link between sustainable finance and the CSO is still a work in progress in many firms."

Hanna joined Barclays in November last year, having spent over five years building Standard Chartered’s sustainability strategy from the ground up. Things have certainly changed in that time.

“In my first job as a head of sustainable finance, I started with an intern, double-hatting another role,” he says. "By the time I left, we had hired just shy of 100 people and we had built a central team with all sorts of capabilities across the bank."

The idea that all ESG teams orbit around an almighty CSO is not altogether far-fetched. For financial institutions that are looking to build a fully integrated strategy, leadership is essential.

There is also a question of qualification and expertise. With growing scrutiny of the legitimacy of claims made by banks of their sustainability credentials and commitments, CSOs and sustainability heads need to meet public expectations on credibility and expertise.

Their roles are designed to ensure that the ESG strategy is embedded across the business, so banks need to invest the resources to make that happen.

“There is a lot of jeopardy around the PR of hiring someone who’s really well regarded in the world of sustainability into a bank and then they leave because they don’t have the right platform to get stuff done,” says Ian Povey-Hall, global head of sustainable finance and impact investing at Acre, a leading recruitment firm.

Equally, an established banker might not have sufficient sustainability chops for the role.

“Having a CSO that has got more of a banking background than sustainability is not necessarily a form of greenwashing,” Povey-Hall says, "But not backing them up with a strong enough team that can deliver the additionality we are looking for to actually engrain the changes across the organization – that is where banks are often not doing enough."

Povey-Hall advocates investment in multi-layered teams.

But embedding an ESG strategy across teams is a complicated task, especially when it isn’t clear what depth of knowledge is required.

The banking industry has been facing an ESG skills challenge for some time now, as regulators and the public at large expect bank sustainability strategies to do more than just apply an exclusion feature to stock selection.

To remedy this, banks have outsourced scientific expertise at all stages of their operations, from project-level consultants all the way up to board appointments.

CredAg, for example, has had a scientific committee since 2019, with 10 experts including Jean-Charles Hourcade and Hervé Le Treut, who has co-authored IPCC reports, and Sylvie Lemmet, who was ambassador for biodiversity during COP15 in Canada.

But when it comes to day-to-day operations, having a lead for every niche sustainability topic on every deal is just not feasible.

UniCredit's Melrose says: “At project level, we may involve scientific experts to measure the impact; whether you need them in-house depends on how much you work on these projects.”

Improving ESG skills within teams is key, and banks are prioritising in-house education. This has fuelled the creation of ESG academic programmes in several investment bank universities.

Melrose adds: “It is becoming more and more of a requirement that some of our client-facing staff and relationship managers gain a level of proficiency on ESG-related topics.”

The Italian bank inaugurated its own university in May 2022 to deliver not just courses on the fundamentals of ESG, but also high-level training.

“We stepped up our expert training last year, aiming to reach around 600 employees between the end of 2022 and H1 2023," Melrose says. "We have a programme with SDA Bocconi and Politecnico di Milano Graduate School of Management in Milan – it is a key part of the strategy.”

Barclays is also rolling out its ESG academy.

“We will put all our corporate bankers through it to embed sustainable finance in our client engagement,” says Hanna.

At CredAg, the investment bank is integrating an ESG course into the group’s university, Ifcam, that will be adaptable to an employee’s current level of understanding and job requirements.

Tanguy Claquin, global head of sustainable finance at CACIB, points out: “We opted to include ESG elements in the required mainstream training programme for most of our staff.”

For many financial services companies, however, the need to upskill has also led to higher demand for external partnerships with international universities and colleges.

Now that most financial institutions have made public commitments on sustainability, they must focus on the training needed to achieve them. Many are having to find ways to bring both senior leadership and staff up to speed.

“We realised that many of the niche insights we are seeking don’t exist,” says Thomas Höhne-Sparborth, Lombard Odier’s head of sustainability research. "So, we established parallel partnerships with academic institutions, including the University of Oxford and E4S [Enterprise for Society Center], and with industry coalitions as well."

External partnerships like these are creating a flow of information from the science community to the financial sector, giving financial institutions the latest and most refined information on some of the key sustainability topics.

“Financial institutions need access to the latest thinking on key social and environmental trends, their commercial implications and what other corporates are doing to respond,” says Thomas Vergunst, programme director for finance sector education at Cambridge Institute for Sustainability Leadership (CISL).

The aim of the CISL programmes is to bring employees up to speed on the urgency, what best practice looks like in a rapidly evolving market, and how financial institutions can make practical changes.

Access to such dedicated education programmes can be a big selling point for banks looking to hire ESG talent.

“We are one of the first banks to actually do more in terms of green financing than so-called ‘brown financing’,” says Claquin at CACIB. "So, for people who want to dedicate their career to this subject, we’re a desirable house."

But it is not just about attracting those who already care about ESG. Banks should be doing more to incentivise their staff to adopt sustainable banking practices.

“If you’re not incentivising your 33-year-old investment banker to incorporate a board-level sustainability strategy in their day-to-day work, the intended outcomes are not going to cascade down,” says Povey-Hall at Acre.

“Teams that are expert need to be continuously at the forefront of the latest thinking on climate science, sustainability issues, regulatory standards, as well as a market and clients’ perspective,” says Hanna.

That is quite a challenge.

There is a limit to how much technical expertise client-facing staff must have to be impactful.

“Beyond dedicated teams, engaging with employees and clients requires a set of people that can talk about sustainability in a non-technical way that is connected to the real-world consequences of these topics,” explains James Purcell, group head of sustainable frameworks at Credit Suisse.

“There is a misunderstanding that every banker needs to be a scientist,” he adds.

Many financial services companies have identified a need for hybrid teams, with bankers who can translate some of that ‘green’ expertise and connect it with the realities of how business is done.

In some cases, that has meant building strong ESG research capabilities.

Lombard Odier has armed itself with economists, engineers, data scientists, geospatial analysts and policy experts to find out what its new operating model should look like.

“A different mindset needs a new team,” says Höhne-Sparborth.

Focusing on the interconnection of sectors and feeding the information generated to investment teams also requires a one-roof policy.

“In most financial institutions, the sustainability team is separate from the investment team,” Höhne-Sparborth adds. "We were set up like that first, but when you operate in that way, there will always be some barriers between teams and things can get lost in translation."

Last summer, CACIB announced that it was developing expertise on new low-carbon tech including hydrogen; it created a number of expert roles to contribute to financing and advisory activities in that field.

Jason Moore, director for investment banking and private markets at financial services recruiting agency Harrington Moore, says: “If you look at the makeup of an energy team’s deal flow across M&A and advisory, it used to be purely traditional hydrocarbon-focused deals. Now in some cases it includes up to 50% of transition deals, and some teams don’t even look at oil and gas anymore.”

Interestingly, Moore sees pure-play energy bankers taking on the topic of decarbonization with fossil-fuel clients and a number of new teams focused on energy transition topics such as biofuels, electric-vehicle charging, or battery storage.

“A lot of them will come from a hydrocarbon background because they can leverage those client relations to broker deals,” he says.

The adoption of a hybrid model is more common within client-focused teams at this stage.

Povey-Hall says: “We are seeing a lot of work done in the advisory teams, hiring individuals that have deep sustainability understanding around sectors and optimal business models to help companies transition.”

It is clear that a systemic transition will require a diverse skill set among the institutions that will be financing it.

“It is important to remember that we are operating in a context of radical shift at a global and systemic scale of our economy and society,” says Campos at CredAg. “Today, our economy functions on the basic assumption that natural resources are abundant, which is scientifically and factually incorrect. If we want our economy to be sustainable, we will have to adapt our economic model and play a crucial role to accompany clients in such transitions.”

That will involve close attention to and monitoring of sector training programmes and decision-making bodies. Creating scientific advisory committees will have little impact if they don’t have the teeth to influence investment decisions. They must have the power to drive change in all sustainability labelled products, portfolios, teams and strategies that aren't aligned with the science.