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Will the rising influence of activism drive corporate ESG commitments and what does it mean for banks’ lending?

Interesting news from the Netherlands in the FT recently where a Dutch court has ordered Shell to accelerate its decarbonisation programme. The impact of this is likely to have profound affects across the industry and, in all likelihood, across the corporate landscape as well.

In the past activist groups and NGOs were a thorn in the side of many a corporate but legal challenges were largely matters of liability. This ruling changes the game. Using legal intervention to drive corporate responsibility sets a worrying precedent for the corporate c-suite. Already challenged by increased political interest in ESG-related topics, the NGO agenda is another step up and applying legal muscle is going to lead to very challenging targets and/or costly and time consuming time in the courts.

This is another important example of the profound and lasting changes being taken to promote internationally agreed climate change goals. And, as we have identified in our Disruption Index, one of a number of complex and sizeable disruptive forces keeping senior executives awake at night.

And, according to our research, while the disruption caused by the pandemic seems less concerning to business than other forces, the long-term impact of increased levels of indebtedness at national and individual corporate level means we are likely to see a new set of winners and losers emerging over the next few years. This got me thinking about banks and how they rethink their relationships in this emerging landscape…

Economic cycles had become reasonably manageable and the impact of the global financial crisis had forced banks to undergo serious self-reflection. Disruptive cycles, which we consider to be the prevailing factor in the business world, present an altogether different challenge. They are multi-faceted, complex, numerous and unpredictable. The pandemic has reinforced these points but as ‘the mother of all disruptors’ has had a pronounced effect on other disruptive factors. In many cases it has accelerated their impact dramatically.

This will require banks to re-examine and optimise their client relationships and lending portfolios. The implications for impairments and Risk Weighted Assets are likely to be profound. Unless the banks take proactive steps to truly understand the forces of disruption and increased indebtedness impacting on their clients at individual name level, not just sector, there is a real risk they will end up with more than their desired share of exposure to the “losers” as industries re-shape in the coming years. The time to act is now, whilst the options for reconfiguring lending portfolios is at its highest.

“Legally, economically and societally the ruling is significant,” said Thom Wetzer, who leads the sustainable law programme at Oxford university. “All companies in the energy industry and all heavy emitters will be put on notice and will have to accelerate their decarbonisation plans.”

Tags

financial services, banks, esg, decarbonisation

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