Davis Kallukaran
As the ESG net widens, companies that fail to define ESG-related goals and then deliver on those commitments will lose out to competitors that do.
Disasters and whether patterns driven by global warming in Climate vulnerable countries have wiped out around one fifth of the economic growth in these countries as per the report published last week. The research carried out by 55 developing nations across Africa, Asia, the Americas and the Pacific, finds that rising temperature and modified rainfall patterns have reduced around $550 billion in wealth of these countries over the last two decades.
The Climate change-Credit risk management-Commercial lending relationship.
Everyone in the world has a responsibility to be more environmentally conscious, especially business owners. It’s a conscious decision to move sustainability and innovation together. There is a relationship between climate change, credit risk management and commercial lending, and banks across the world, are keeping a keen eye on this. Banks have started creating a plan to mitigate climate risk in their commercial loan book. The financial institutions have been writing off quite a sizable amount of their loans due to natural calamities. Similarly the insurance companies have been settling huge claims on account of the calamities caused by The pace of this write offs have increased tremendously in the last few decades on account of natural disasters which are mostly caused by the exploitation of nature by mankind for urbanisation, industrialisation and mining. It is high time that the lenders started doing a due diligence on the activities of their customers to understand whether they are financing an idea which may contribute to climate change and sustainability and ESG in general. ESG criteria’s are driving commercial lending approach of the financial institutions especially, climate risk.
ESG initiatives in Oman
The Environmental Social and Governance (ESG) initiatives, especially the climate change and sustainability reporting, being taken by the central bank of Oman is very encouraging. CBO has recently issued a circular to the banks on mandatory compliance with climate change reporting and sustainability. The capital Market Authority (CMA) and the Muscat Stock exchange (MSE) have also issued statements calling for voluntary disclosures by the listed entities in Oman. Following the global response, in due course, we expect Insurance companies will have very similar obligations
International Sustainability Standards Board
The most significant development in ESG Reporting for some time now is the creation of the International Sustainability Standards Board under the IFRS Foundation and is a major step towards convergence of the currently fragmented reporting landscape. The board is expected to issue the new Standards by the end of the year for setting out requirements for the disclosure of material information about a company’s significant sustainability-related risks and opportunities that is necessary for investors to assess a company’s enterprise value.
ESG elements
The acronym “ESG” encompasses a great many elements and activities. The environmental element covers energy, waste, carbon emissions and climate change. Social criteria includes an organisation’s relationships with other institutions and communities, its diversity and inclusion, workers’ rights, child labour, and human trafficking. Governance, apart from incorporating the environmental and social elements outlined above also encompasses the procedures, practices and risk management controls an organisation puts in place to operate in a regulatory compliant and ethical manner. These are essential components of achieving and maintaining market integrity as well as driving responsible and sustainable performance. Each of these elements have a direct impact on the perception of an organisation, and therefore its reputation. As the ESG net widens, companies that fail to define ESG-related goals and then deliver on those commitments will lose out to competitors that do. The United Nations too have laid out principals of ESG as the best practice for Responsible Investment (PRI) that are dedicated to promoting environmental and social responsibility among worlds investors.
(Davis Kallukaran is Managing Partner of Crowe Oman)
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