Banks must actively convince clients that ESG is proper and profitable

The Situation: Coutts is reportedly the bank of Queen Elizabeth II… and Stormzy, a British rapper. Despite the latter’s usual flair for philanthropy that includes a scholarship program at Cambridge University, you still might be forgiven for assuming that Coutts, a private bank largely dealing with the very wealthiest clients, might not have its finger on the sustainability button.

But Coutts integrates environmental, social, and governance (ESG) factors throughout its portfolios and brings clients along on the journey based on the belief that sustainable investments have better or equal returns and lower risk. With 75% of its clients indicating they care about ESG, Coutts has embedded ESG across all managed investments. Banking and financial services (BFS) firms are placing sustainability worryingly low on their priority lists (see Exhibit 1). We cannot understate the impact of banks’ investments in business and infrastructure in the pursuit of decarbonizing and addressing all 17 UN Sustainable Development Goals. They must make sustainability native and convince their clients that it’s simultaneously the right decision for the planet, people, and their portfolios.

Exhibit 1: Environmental sustainability is quite literally bottom of the BFS priority list—this must change

Sample: 67 banking and financial services leaders
Source: HFS Pulse Survey, H2 2021

Sustainability cannot afford to be a siloed product in banking’s approach to ESG

Where many banks and capital markets firms have set up dedicated ESG portfolios (covering the environmental, social, and governance factors underpinning sustainability) while keeping their “normal” portfolios unchanged, Coutts embeds ESG within all its managed funds and client portfolios. It attempts to prove to its clients through outcomes that ESG investments have lower risk and increasingly offer better returns. We’ll touch on ensuring “ESG investments” are truly sustainable later.

At Infosys’ recent Europe Leadership Forum in London, Peter Flavel, Coutts’s CEO, outlined how most of its clients are advocates for ESG investing. Some still need convincing out of the legacy mindset that sustainability inherently means a trade-off with cost (in this case, damaging their returns). Others are against the idea of their banks meddling too heavily in their investments. Coutts is working on it. This mirrors the approach of a growing number of organizations going broad rather than siloed when it comes to ESG: Sustainability cannot be a standalone strategy. It must be embedded natively within the whole organization. The same has been a success factor in the last decade or more, chasing a horribly vague “digital transformation” that too often results in siloed technology pilot projects or centers of excellence (COEs).

Coutts is the first UK private bank to achieve B-Corp certification, a growing standard of verified ESG performance. Five years ago, it asked itself what approach it should take to ESG investing. Where most asset managers kept their existing businesses and set up new but separate ESG funds, Coutts applied ESG filters on all funds and set out to prove that it could achieve the same or better risk-adjusted returns over the long term. Then it spoke to clients, and 75% revealed they wanted ESG filters on their investments; 25% were less enthusiastic, often saying, “it’s not your job, let me invest my money.” Although half of the ESG advocates prioritized ESG impact over return, Coutts demonstrates there is no need to compromise.

To achieve B-Corp certification, Coutts responded to hundreds of questions about customers, communities, and the environment. Achieving this certification is understandably not an easy feat, especially for a bank more than 300 years old. Coutts now joins the ranks of 4,100+ companies globally across 77 countries, including Patagonia and The Body Shop. Coutts changed its articles of association and committed to a process of improvement and continually raising the bar.

Seventy-five percent of our clients wanted ESG filters on their investments. And half of those said they’d accept lower returns. But the good news is that we believe we can achieve the same or better risk-adjusted returns over the long term on our ESG investments. Most asset managers have standalone ESG portfolios separate from their normal business. Coutts is already embedding ESG in all its investments.
– Peter Flavel, CEO, Coutts

Banks must integrate sustainability internally and in all their offerings—and make it believable—for us to have any hope of reaching net-zero

Banks and firms throughout the BFS ecosystem must integrate sustainability into their internal operations and throughout all their product and service offerings. Consumer, corporate, and institutional investors (such as universities) will keep moving their money away from fossil fuels and other sectors not compatible with meeting goals across sustainability like decarbonizing to net-zero emissions by 2050. It’s well-established that we cannot keep investing in fossil fuels to meet this target. Despite this stark truth, investment continues to flow into coal, oil, and gas. Coutts’ approach is more about engaging with energy companies and understanding if they have a clear path to net-zero and becoming greener rather than completely avoiding them.

BFS firms must prepare to not only integrate sustainability into their offerings and operations but also to have the technology, processes, and experts in place to adequately analyze risk and accurately assess investments’ sustainability to avoid accidentally greenwashing (investing in a business or project falsely masquerading as sustainable—there’s a different conversation to be had with those purposefully greenwashing).

Organizational-level strategies must meticulously break down into roadmaps and targets for all managers and employees. The more CEOs and boards are judged and paid based on ESG criteria, the more they will seek to address sustainability. To do so, they need to present company-wide mandates. There must be clear leadership from the CEO desk but also in the form of a sustainability champion and an overarching strategy (taking the company from the here-and-now toward decarbonizing and reaching net-zero by 2050, or as soon as possible, for example). But that’s not enough. The C-suite must be accountable for delivering on that strategy. CEOs and boards should incorporate sustainability into their targets and ensure the data and processes are in place and aligned to allow the company to measure and monitor progress. Too often, organizations see an “hourglass” barrier to sustainability, where those at the top push a mandate, their employees and customers are demanding the company do more, but throughout middle management and processes, the alignment, talent, or accountability is lacking.

The Bottom Line: Coutts has integrated sustainability and convinced clients to join it on the ESG journey—the bar has been set for a BFS industry severely failing to realize its responsibility AND opportunity.

One insurance client told Coutts that the bank had no role in ESG. But on the contrary, when banks fund companies and infrastructure across the world, it’s impossible to think they have anything less than a critical role in decarbonizing economies and making progress on all UN Goals.

On a simple level, we know the world needs to reach net-zero by 2050 (at the very latest) and address all 17 UN Sustainable Development Goals. BFS firms must align their investments and their company-wide processes with these goals. This isn’t a case of chasing an undefined endpoint like we have been for more than a decade with digital transformation. Banks and the whole BFS ecosystem must address their own ESG goals and bring their customers on those journeys by assuring them of lower risk and acceptable, identical, or better returns. It won’t be an easy sell with every client, but Coutts proves the possibility.