The importance of ESG in 2020

I’d tell you that you’ve never been more wrong, especially if what’s being cut relates to the company’s Environmental, Social, Governance - or ESG - framework, which some may see as unnecessary. In fact, I’d argue that ESG efforts should be the very last thing on the chopping block.

ESG is often confused with sustainability, and while it’s a complimentary concept, the two are not completely interchangeable.

In sustainability strategies, we see a company’s understanding of how they can best use their products and services to help society achieve a more sustainable future, or perhaps do their part to impact the UN Sustainable Development Goals. ESG refers to how the same company manages itself in three dimensions - Environmental, Social and Governance. Sustainability initiatives may be part of a company’s ESG efforts, but they more often than not don’t comprise all of them. Importantly however, ESG references how a company manages and maximizes its own non-financial risk.

More than any year before it, 2020 has proven that prudent management of a company’s non-financial risk has meant the ability to better weather the many and varied storms that the year brought. For instance, how a company handles employee health and welfare has been especially important during COVID-19. Or how a company’s governance practices around business continuity planning prepared it to deal with a pandemic. Or in the financial industry, for instance, how institutions have been able to continue adhering to regulatory requirements, even as employees shifted to working from home and branch networks were closed, has been hugely important.

In his Harvard Business Review article, ‘Making Sustainability Count,’ George Serafeim says he believes that ESG issues will continue to be relevant to investors, even in the face of a pandemic and economic downturn, “because companies are likely to be more resilient in the face of unexpected shocks and hardships if they are managed for the long term and in line with societal megatrends, such as inclusion and climate change.”

In essence, adhering to an ESG framework means you are future-proofing your business, and those that made this a priority in the years prior to 2020 are also those that have had more tools to deal with the pandemic’s varied impacts.

In her article, ‘Sustainable investing is set to surge in the wake of the coronavirus pandemic,’ CNBC reporter Pippa Stevens reiterates this point saying that “companies with higher ESG ratings are proving that, in many cases, they are better-equipped to weather the storm. Analysts at Bank of America found that companies with below-median ESG scores have seen larger downward EPS revisions this year, while Morgan Stanley found that in years of market turbulence, including 2008, 2009, 2015 and 2018, sustainable funds’ downside risk was substantially smaller than traditional funds.

With an increasing focus on how a company manages its ESG efforts by institutional investors, customers and even future employees, it’s incumbent on all businesses to take a hard look at how they’ve managed ESG governance throughout 2020, with an eye toward how today’s considerations can turn into tomorrow’s advantages, and in this current environment, stability.

At BBVA our ESG efforts are grouped under the umbrella of ‘Responsible Banking,’ which is a strategy based on principles that govern all bank policies and behavior. This effort is based on four pillars:

1. Balanced relationships with our customers based on transparency, clarity and responsibility;
2. Sustainable finance to help global climate change & attain the UN Sustainable Development Goals;
3. Responsible practices with employees, suppliers and other stakeholders; and
4. Community investment to promote social change and create opportunities for all.

To inform our strategy, BBVA conducts an annual materiality exercise to identify priorities. These are further prioritized according to stakeholder importance, and an analysis of social media and networks, trends and the industry landscape. The issues are then assessed for their impact on BBVA’s strategy, with a focus on the company’s six strategic priorities.

Some of the initiatives within the bank’s ESG framework include:

• Pledge 2025, which is the BBVA Group’s strategy to address climate change and support sustainable development, including:
  • Commitment to mobilize 100 billion Euros in support of sustainable development;
  • Commitment to be carbon neutral in 2020, while setting emissions-, water-, and waste-reduction goals; and
  • Signatory of the Principles for Responsible Banking, committing that BBVA will align actions to the UN SDGs and the Paris Agreement on Climate Change.
• Link bank’s variable compensation to achievement of the Group’s financial and non-financial strategic objectives.
• Commitment to transparent, clear and responsible communication with our clients.
• Taking a stance on racial equity and social justice by sending Congress a letter encouraging police reform.

And these are just a few initiatives under BBVA’s ESG framework. Even so, it’s easy to see how BBVA is setting itself up for future success now by considering risks that it may incur in the future. For BBVA, these initiatives are anything but unnecessary. They are imperative.

Indeed, 2020 is not the year to set aside the non-financial risk planning that a solid ESG framework provides. If anything, 2020 has proven that time spent on ensuring solid ESG standards will reap future rewards.