22nd April, 2020Jeremy Denton-Clark

Environmental, Social, and Corporate Governance (ESG) Framework for Financial Institutions

From natural resources scarcity, to rising global concern about the environment, to a continually evolving regulatory landscape, banks are being required to build on and enhance their Corporate Governance Code to include provisions for the protection of the environment and the delivery of social responsibility. The Corporate Governance Code has become the ESG Code, standing for the Environmental, Social and Governance Code.

What exactly is an ESG Code? It is broadly the existing Corporate Governance Code with environmental and social responsibilities added. However, it is a bit more than that as the Corporate Governance side of the ESG Code also has additional disclosure and transparency requirements to conform to best international practice.

The framework we set out below, and it is just a framework not an ESG Code in itself, aims to give financial institutions a guideline on what is now expected from many regulators, rating agencies and international investors. It may be missing some items or it may include items that would give rise to local difficulties, the intention is to provide a framework that individual financial institutions might like to think about.

Protecting the Environment

Nobody is going to argue that climate change, pollution let alone global pandemics are going to have a profound effect upon the security and viability of the loan portfolios of banks. Identifying, assessing and limiting the impact is challenging but banks are taking a considerable risk if they don’t take a good look at the following and build it into their risk management system:

  • Vulnerability of the loan portfolio to climate change and pandemics
  • Monitoring the environmental sustainability of the loan portfolio
  • Development of financial products for green projects, clean tech’ and renewable energy
  • Recording the carbon footprint, pollution, packaging material and waste of clients

Delivering Social Responsibility & Culture

Financial institutions are the pillars of the financial community, both regionally and nationally. They are expected to take the lead in good practice in looking after their own staff but more broadly being an example to the world at large of acting fairly and without prejudice. Banks as leveraged institutions exist on their reputation, put that at risk and their deposit base could wither.

  • Fair competition, anti-cartel compliance and prevention of all forms of corruption
  • Access to finance for the local community
  • Absence of all forms of discrimination: colour, race, age, gender, religion, disability, origin

Business ethics and corporate culture:

  • Maintenance of client confidentiality, GDPR and Intellectual Property rights
  • Compliance with all domestic and international law and regulation
  • Prompt payment of taxes, national insurance contributions, fully funded pension scheme
  • Full disclosure and transparency to international standards (see below)

Working conditions:

  • Health and safety in the workplace
  • Training and education of staff
  • Annual staff reviews and succession planning
  • Grievance mechanism for employees and affected groups

Corporate Governance

Corporate Governance Codes have been around for some decades and have gradually been expanded both in scope and in content. The regulatory requirements are now extensive, in particular for financial institutions that are quoted on a stock exchange, and best practice indicates that financial institutions need to consider inclusion of the following:

Purpose & Strategy

  • Mission Statement and Vision Statement
  • The Business Model
  • The Strategic Plan and annual Business Plan
  • Risk Appetite of the Board of Directors
  • Key Strategic Initiatives and Key Performance Indicators

Structure & Functioning

  • Role, responsibilities and limitations on shareholder involvement
  • Direct and indirectly connected shareholders
  • Related party transactions directly and indirectly connected to shareholders
  • Annual General Meeting of shareholders (and Emergency General Meetings)
  • Rights and treatment of minority shareholders

Board of Directors

Nomination, role and responsibilities

  • Selection and composition of the Board of Directors
  • Role, responsibilities and limitations on the Board of Directors
  • Role and responsibilities of the Chairman of the Board of Directors
  • Links with shareholders

Structure of meetings and the balance of power

  • Structure, agenda and frequency of meetings
  • The concept of collective responsibility
  • Committees of the Board of Directors: Nomination, Remuneration, Audit
  • Independence, qualifications and diversity

    • The role and function of Independent Non Executive Directors
    • Education and relevant work experience of all directors
    • Diversity by age, gender, ethnicity
    • Regular board evaluations

    Executive management

    • Role and responsibilities of the Chief Executive Officer
    • The Board of Management: structure, role and responsibilities
    • Committees of the Board of Management: ALCO, Credit, Risk, Procurement
    • Support

    • Organisation structure supporting implementation of Corporate Governance
    • The role of the Company Secretary

    Review & Assurance

    Internal Controls

    • Management and Board of Directors oversight
    • Standing Orders: connected lending, insider trading, large loans etc.
    • Independent and fully staffed Risk Management Division
    • Independent and fully staffed internal Audit Department
    • The Compliance Department (including whistle blowing)

    External Controls

    • External qualified Independent auditors
    • Bank law and prudential regulation (including SREP if applicable)
    • The Basel Accords, in particular implementation of Basel II and III
    • Conformity with international law e.g. sanctions, FATCA, MiFID II, IDD etc.
    • Reviews by Credit Ratings Agencies and bank creditors
    • Press articles and publicity

    Disclosure & Transparency

    • Main shareholders
    • Financial Position and Performance
    • Accounting standards and policies
    • Governance and Risk Management
    • Principle risks in the business/stress tests
    • Salaries and Incentive scheme


    This is a long list that aims to include more or less everything that is expected for best international standards. It is appreciated that some requirements may give rise to difficulties, in particular bank confidentiality requirements should not be compromised but also issues that the bank might feel could result in reputational damage should they be disclosed. This could lead to conformity and risk avoidance which might in the medium term not be beneficial to the local and national business community.

    There are considerable benefits to implementing an ESG Code but there are also costs. The main medium term benefits are cheaper funding, tighter risk control and corporate efficiency but in the short term there will be additional costs as the systems and procedures are put in place.