With ESG finance gaining momentum in the investment banking system worldwide, banks have started developing strategies to incorporate sustainability factors into their investment and lending decisions. ECM investment banks require credible and comprehensive ESG strategies to benefit from the accelerated growth of ESG banking.
Whether it’s ESG integration, screening, engagement, or thematic investing, ESG-focused investment banks have multiple sustainable strategy options at their disposal. Here is a breakup of ESG’s role in ECM investment banking and their sustainable banking strategies.
- Asset and Investment Optimization
Sustainable investing enhances ROI by allocating capital to ESG-compliant and promising investment opportunities. It helps a company avoid investments with lower payoffs in the future, resulting from long-term sustainability issues in its systems. As far as ESG is concerned, the do-nothing approach erodes the returns rather than improving them. Relying on energy-consuming equipment and plants for long drains the finances going forward. While investments must update their operations over time, waiting it out proves to be expensive of all.
Regulatory responses for emissions affect energy consumption and impact the balance sheets of carbon-intense companies. Restrictions on such industries will introduce more constraints on such businesses. So, getting ahead of the curve by repurposing the available assets will help a company catch up.
- Cost Reductions
ESG can significantly reduce the costs involved in ECM investment banking. Effective ESG execution helps combat rising operational costs, such as raw materials, water, and carbon expenses. It can considerably affect profits and efficiently increase a company’s resources across several sectors. Resource efficiency has a strong relationship with financial performance.
Being proactive about ESG risks gives a competitive intelligence services advantage to a company that prevents pollution by reformulating its products, improving its manufacturing processes, recycling production waste, and redesigning equipment. Improving maintenance, refining inventory management, and handling energy consumption helps a company achieve significant cost savings.
- Top-Line Growth
A robust ESG proposition helps an investment bank expand into its existing markets and tap new ones. When bank executives trust corporate actors, they award them with fresh growth opportunities through licenses, approvals, and access.
Banks involved in social engagement activities benefit the public and stakeholders. As a result, they have an easier time extracting resources without excessive planning. These banks achieve higher valuations than others with reduced social capital. Since more customers are willing to go green, they are ready to spend more on industries that perform well.
- Improved Employee Productivity
A strong ESG strategy helps companies draw and retain high-quality employees, enhancing their motivation, giving them a sense of purpose, and increasing their overall productivity. High employee productivity and satisfaction levels lead to better stock returns than competitors. Moreover, employees who feel satisfied and connected with the organization perform better. Employees motivated to bring benefits to their employers tend to act in a more pro-social manner. When they get more from their employees, they react happily with enthusiasm.
Just as satisfied employees perform better, weaker ESG in ECM investment banking may drag their productivity down. It often results in worker slowdowns, strikes, and other unfavorable labor actions in an organization. Besides that, it may also manifest across the company’s supply chain. Suppliers may give more orders to competitors who are more concerned about their workers’ safety and health.
- Minimal Legal and Regulatory Interventions
ESG proposition enables an investment bank to ease regulatory pressure and gain more strategic freedom. Sustainability reduces a company’s risk of violating government action, leading to state intervention that no one wants.
- Supportive Policies to Empower Employees
Restructuring Solutions for Investment Banks need to give special attention to their existing and future employees. Any worker wants to choose a workplace that demonstrates a commitment to the planet and people, along with profit. Banks that protect employees with their support, care, and policies stay at the front of ESG investments. The Covid-19 pandemic was the right time to measure how an institution walked regarding ESG. Their actions significantly affect how customers, stakeholders, investors, and employees view them then and in the coming years.
Over the coming years, the responsibilities of banks that sponsor ECM investment banking deals will likely increase as more regulators mandate ESG disclosures. Banks may require experts to report on the issuers’ ESG disclosure and policies. Therefore, it has become more challenging to plan ECM investments without addressing ESG in their marketing campaigns.
