Australian banking is undergoing a massive transformation. Already, responding to new technologies and the rise of neo-banks and other non-bank lenders, our banks – and the Big Four in particular - have jettisoned their legacy wealth and life insurance businesses while embracing new technology and innovation. And now ESG is pushing this transformation drive further.
The centrality of ESG to the economy is hard to understate and represents a huge business opportunity for our banks. This is because maintaining good ESG credentials across areas like sustainability and diversity and inclusion is suddenly crucial for growth, staying competitive, accessing affordable capital.
Deloitte research shows that more than half of Australian corporate M&A leaders have embedded ESG impacts and concerns in their decision-making process, while a fifth of those dealmakers have walked away from a transaction due to concerns about their target’s ESG practice.
Assets under management in ESG-geared funds crossed the $US1 trillion threshold in 2020, and the following six months saw $US103 billion worth of corporate and fund ESG activity.
It follows that the opportunity for the banks lies in the growing demand for services that assist clients with achieving their own decarbonisation and broader ESG objectives. To do this, banks are engaging in a little M&A activity of their own to expand into business lines traditionally outside of their service offerings.
They have realised the enormous opportunity for growth in what is a fundamental realignment of capital flows to fund a sustainable, low carbon, future. This is plain to see not just through the banks’ ever-increasing involvement in green bond and loan markets, but also through ambitious public commitments made to decarbonise their operations.
This green push reached a crescendo last year in the lead up to COP26, when ANZ, CBA, Macquarie and NAB joined the Glasgow Financial Alliance for Net Zero and committed to aligning their lending and investment portfolios with net-zero emissions by 2050. So, what are the next steps?
First, there will be a continued offloading of business divisions viewed as “non-core” in favour of sustainable alternatives. Even if a potential transaction isn’t explicitly motivated by ESG concerns, it must be viewed through that lens as a matter of prudent risk analysis and to ensure potential additional sources of value creation are not missed.
Macquarie was first to consciously pivot into the green economy, its efforts famously including the prescient £2.3 billion purchase of the UK Government’s Green Investment Bank in 2017. Now, Australia’s retail banks are looking to get in on the action.
Earlier this year ANZ spent $US50m to acquire a minority stake in Pollination, a climate change investment and advisory firm with capabilities far outside of the bank’s traditional business lines that will allow them to directly benefit from firms wanting to assist in the global transition to net zero.
The other banks are certain to follow in ANZ’s footsteps, although we predict these inorganic opportunities will become more competitive as bidders crowd into the global market for companies with capabilities like Pollination.
Second, the banks must apply an equal focus to the non-environmental letters in the ESG acronym – social and governance.
These broad terms can apply to anything from data privacy and modern slavery concerns to matters of social justice like serving the underbanked and helping stop financial abuse. Customers are growing both more environmentally and socially conscious and are increasingly choosing to bank with organisations that act in these areas.
Third, the banks must quantify the ESG credentials of any new acquisitions through proper due diligence, applying the proper tools to model everything from the extent to which the investment will accelerate or disrupt decarbonisation commitments to the transparency of its supply chain. These considerations could radically impact valuation decisions and impact the course of a deal.
Fourth, banks must account for ESG in integration. Cultures, processes, and policies can differ wildly between organisations, so it is crucial to institute a clear and consistent ESG governance structure that includes clear KPIs that executive compensation is measured against and ESG training for staff.
The ESG revolution is underway, but it isn’t too late for our banks to get ahead of the curve and unlock deep value that will pay dividends for their customers, clients, shareholders, our economy, and the environment.