Stuttgart. Environmental, social and governance, or ESG criteria for short, are increasingly being targeted by the Bundesbank and the financial regulator Bafin. They complain that credit institutions do not adequately implement the requirements for themselves and their customers. “The extent to which the banks make progress here will be the supervisory focus in the coming years,” threatens the Bundesbank. It plans more audits and a “climate risk stress test”.
CO 2 and supply chain risks determine the loan interest rate
In the banking industry, however, ESG is also viewed as a growth topic. Many financial institutions sense additional business. “However, many are not yet in a position to realize this potential,” confirms a study by the consulting firm McKinsey. From 2025 onwards there will be an annual income potential of 7.5 billion euros.
The ESG criteria initially mean additional work for financial institutions. Staff must be hired and trained. They currently employ an average of four ESG specialists. For example, the experts have to analyze to what extent weather risks caused by climate change, changes in markets or problematic supply chains can put a strain on lending.
Banks also have to adapt many of their processes so that the new flood of data can be recorded and evaluated. “We will have to significantly increase staff,” explains Alexander Müller, CEO of Volksbank in Offenburg, which is one of the largest cooperative banks in Germany. However, the additional effort does not make the loans more expensive, says Müller. The tough competition in the industry prevents this. So the banks are left with the additional costs that politicians are forcing on them for the time being
The ESG criteria make negotiations between banks and companies more complex. Companies must provide data and a representation of how they are progressing with their sustainability strategy. Small and medium-sized businesses in particular can quickly find themselves overwhelmed. For this you need support from service providers. “We help with the mediation here,” confirms Müller. In fact, banks only accept data that has been recorded and checked by recognized specialists. “We can’t do this ourselves,” emphasizes Müller.
Landesbank: Companies cannot avoid dealing with ESG
“The increased disclosure requirements are increasing the burden on companies,” admits Olaf Schween, Head of Corporate Finance Advisory at Landesbank Baden-Württemberg (LBBW). In the end, the financing becomes more expensive due to the additional effort for the company. But companies cannot avoid dealing with ESG. LBBW’s announcement is clear: If companies commit to operating more sustainably based on verifiable criteria, they will be rewarded with lower interest rates.
LBBW is considered a driver of ESG in the industry. The large credit institutions, for their part, have to deliver and prove to the financial regulator that they do not have too many “brown loans” in their portfolio. They put entire industries to the test in order to analyze whether there are too many customers from the automotive industry or from energy-intensive sectors. Deutsche Bank announced last year that it would radically clean up its loan portfolios.
Volksbank boss Müller rejects such a request. “Our approach must be to support companies in the transformation and not to send them away.” Anything else is not compatible with the cooperative mission of a Volksbank. However, the former head of corporate customers at the Deutsche Apotheker- und Ärztebank urgently warns medium-sized companies to quickly adapt to the new conditions and resolutely tackle the necessary transformation. Because he is convinced that the price hammer in financing is yet to come: “It is only a matter of time before the regulators allow the ESG criteria to be backed with equity capital.” If companies do not take the initiative, their financing will become noticeably more expensive .
ESG can influence company sales and acquisitions
ESG can also influence company sales or takeovers, as a study by the consulting firm EY in Stuttgart shows. It is crucial that sustainability is embedded in the entire structure, from the strategy to the corporate processes. This is the basis for ESG-compliant reporting and simplifies the transaction process enormously.
Anyone who hides gaps will ultimately deter potential buyers when they examine the company as part of due diligence. “The Corporate Sustainability Reporting Directive (CSRD) forces companies to also determine and report data on sustainability performance,” explains EY expert Sebastian Binder. Many people are not yet aware of the significance of this reporting requirement.
ESG is becoming a criterion
ESG is the abbreviation of Environmental, Social and Governance. Behind this are guidelines that are intended to encourage companies to act more sustainably. The most well-known are environmental criteria such as CO 2 emissions or waste avoidance. It’s also about fair pay – including for suppliers – and the fight against corruption. Financial investors and lenders are increasingly basing their decisions on the extent to which companies take ESG criteria into account.
