Fusing environmental, social and governance (ESG) principles into the Ghanaian banking industry and payments ecosystem

The United Nations General Assembly in September 2015 came up with a set of 17 Sustainable Development Goals (SDG’s) which each UN member nation was to attain by the year 2030. Seven (7) years to the proposed attainment date, it is important to take stock of the various inroads made towards these goals and look to resolving the issues that have prevented nations from attaining these goals.

The SDG’s to be focused on for the purposes of this article are Goal 6:

Clean water and sanitation, Goal 8: decent work and Economic Growth, Goal 13: Climate Action, Goal 15: Life on Land, and Goal 16: Peace, Justice, and Strong Institutions. These goals collectively have formed the basis of what is known as the ESG’s.

The term ‘ESG’ refers to a set of environmental, social, and governance concerns in an economy. It characterizes the risks and prospects which may in uence an organization’s capability to set up long-term goals, including but not limited to the following: climate change and resource scarcity, data security and compliance, board diversity, executive pay, and tax transparency, as well as social impacts.

For investors, ESG is the act of nancing businesses that show a positive impact on the environment, back their stakeholders, and show ethical leadership and good governance. Incorporating ESG into organizations is the practice of including ESG concerns in decision-making, risk frame- works, corporate practices, and governance.

Incorporating ESG into mainstream banking is becoming integral in assessing the performance of banks; not just in meeting compliance requirements, but for investors and Foreign Direct Investment (FDI) prospects within the banking sector. There has been a signi cant advancement in embracing the Principles of Responsible Investment cosigners – which rose from 250 in 2006 to almost 4,000 assets in 2021, with an overall volume of approximately US$120 trillion under the Principles of Responsible Investment Management.

ESG initiatives o er numerous bene ts to banking Institutions and the payments industry, which comprises of reduced costs, nancial inclusion due to social focus, positive stakeholder impact, and sustainable economies and value creation. Realizing the value of ESG, several Financial Institutions have assertively began concentrating on incorporating these principles. Consequently, the move from ESG being just a slogan to its real application in global organizations is evident.

Attaining the 2030 Agenda for the 17 Sustainable Development Goals is a global responsibility, more especially for the banking and payments sector as key advocates to inclusive economic growth. The nancial sector as an enabler of economic growth will need to relook at how they fund economies to ensure that strong emphasis is placed on Environmental, Social and Governance (ESG) vulnerabilities. ESG has become a very critical means to evaluate performance in the nancial sector.

Overall, given how closely related ESG issues are to the payments industry, it is only likely that a compelling ESG development could add value to this industry in the future.

ESG FROM A PAYMENT’S PERSPECTIVE

Having looked at the basic concept of ESG and its importance for the entire economy, let us now focus on how ESG connects with the payments industry.

The Environmental principle shows how an organization relates with the impacts of the physical environment. The Environmental part of ESG is an important feature in the banking and payments ecosystem. To integrate this in the industry’s operations, payment organizations, and banks have introduced several initiatives.

Banks and technology partners are repurposing the overall banking service abilities to enhance their nancial wellness aims and ESG impact. The consumer units in various global banks have introduced other Application Programming Interfaces (APIs) to work together with external partners who have committed to designing new green products and increasing customer awareness about the environmental e ects of the transactions they perform.

For instance, Encountabl is a US-based FinTech which has developed a solution that enables banks and Financial Institutions to o er transaction-based impact calculations to customers, using merchant category codes or invoices. This technology is available through one of the largest cloud service providers as a straightforward API that organizations can integrate into their digital banking and payment services to provide customers with useful information directly. Also, Aspiration Bank which is based in the US with the help of a third party has been able to develop a payment processor which has integrated ESG criteria into their payment processing systems. They can use the transaction data to identify companies that have strong ESG performance and prioritize those transactions.

Further, banks and the players in the payments industry can o er sustainable payment options to their customers, such as payment methods that support renewable energy or carbon o sets. This can encourage customers to make more sustainable choices and help reduce the carbon footprint of payment processes.

Implementing eco-friendly materials for payment products is another way banks can fuse ESG into their operations. Lately, banks are progressively switching to green energy providers and vendors for low-energy lights in o ces, ATMs, etc. One of the best examples is that of plastic cards which have a weighty carbon footprint. To decrease this, eco-friendly credit cards are being introduced and circulated to o set the plastic ones. These days, many issuing banks have switched to biodegradable plastic cards. These are the perfect replace- population to access digital payments services. In Ghana, almost every bank has launched the USSD versions of their mobile app with the help of the telcos to o er banking services to people who don’t have access to smartphones. For instance, Ecobank Ghana PLC has introduced *770# for its customers to access mobile nancial services on their feature phones. Again, many banks in Ghana are serving the unbanked and underbanked population by o ering them with the agency banking solution. ments for traditional plastic cards as they are easily recyclable, chlorine-free, and nontoxic when burnt. Apart from promoting the use of biodegradable cards, nancial institutions, are also enabling and encouraging customers to explore and make other eco-friendly and digital choices. Some of these initiatives include transacting with digital branches and making paperless payments.

The Social principle shows an organization’s relationships with, and its reputation among, individuals and institutions in the communities in which it performs business activities. This aspect is very material in the banking industry and the payments ecosystem. It includes labor relations, diversity, human capital development, labor and management, working practices and conditions, health and safety, supply chain standards, and equal opportunity initiatives.

Over the past twenty years, the scope of the social part of the ESGs have gradually expanded, re ecting the changing business environment of the contemporary world where markets and businesses are becoming more integrated and interdependent. The banking sector and payments industry are tackling the social aspect through several actions for stakeholders. Some of these initiatives, being undertaken on the behalf of the stakeholders, have been emphasized below.

(i)

Financial inclusion

The banking sector and the payments industry are implementing many initiatives for the nancial inclusion of the marginalized sections of society in Ghana. O ine payment is an initiative that banks are using to bridge the nancial inclusion gap. In areas with a lack of or no connectivity or internet access, o ine payments options help the underserved and unbanked

(ii)

Financial literacy initiatives

The intention of these initiatives is to raise awareness about nancial services and products, help customers make well-informed nancial decisions, adopt digital modes, and protect their rights.

For instance, Ecobank Ghana PLC as part of its Ecobank Day celebration in 2022 with support from the Ecobank Foundation launched a campaign which had a focus on promoting nancial inclusion and nancial literacy, especially amongst women and youth in marginalized communities.

(iii) People development

Banks have been putting more e ort into bringing about change within their organizations by supporting their sta , running best-in-class training, creating employee engagement programs, improving workplace diversity, and introducing numerous digital upskilling and learning and development programs for employees. Some banks in Ghana have several courses in a catalogue which they require their employees to undertake monthly and are attached to their KPIs.

The Governance principle, which covers the internal system of rules, controls and processes adopted by businesses to govern themselves, make e ective legal decisions and ful l the needs of stakeholders. These stakeholders comprise of the board of directors, senior management, employees, shareholders, customers, and the Regulator. Governance is a signi cant and essential parameter for any bank with a legal status. Business ethics, tax transparency, CEO compensation, shareholder democracy, and board diversity and structure are some examples of governance considerations. Understanding this facet of ESG is important because governance risks will likely grow with the ever-changing social, political, and cultural landscape.

Banks and payments rms need to guarantee that all business decisions are made ethically and in compliance with the de ned rules and regulations by the Government. The focus of corporate governance is to assist with the development of the climate of trust, accountability and transparency required for promoting long-term investment, nancial stability and enabling societies with better growth.

One of the key initiatives being undertaken by banks in regard is the linking of employee payouts to ESG goals. ESG is progressively being implemented by various banks and rms in the payment industry as a new criterion in the CEO variable pay and incorporated into the top management’s key performance indicators (KPIs).

HSBC, Barclays, ING, NatWest, Société General, and Westpac which are leading banks in the banking industry globally, have initiated linking incentive compensation for senior managers to various ESG priorities such as gender pay parity, nancial inclusion, and carbon neutrality. They have also linked the bonus calculations for every employee to various ESG goals set.

In addition, ESG data is being released through ESG reporting. Banks in Ghana can start publishing a separate ESG report along with their annual reports, and that are completely compliant with the Bank of Ghana’s Sustainable Banking Reporting requirements. These ESG reports are aimed at raising awareness about the bank’s ESG initiatives, improving investor transparency, and encouraging other organizations to adopt and incorporate ESG programs into their business operations.

Benefits Of Esg To Banks And Payments Industry

(i) Reduced costs. Banks, nancial institutions, and other players in the payments industry can cut down on operational costs due to their adoption of environment-friendly and digital alternatives. ESG reduces costs for banks by including numerous measures like cutting back on paper use, recycling, switching to low-energy options and using eco-friendly raw materials for their products. For instance, digital payments technologies reduce the need for paper money. ATMs, which use resources such as electricity and paper, now provide an alternative in the form of mobile applications that do not require paper. Also, they are increasingly opting for e-messages/SMSs rather than o ering paper receipts, further reducing paper use.

(ii) Risk management

Banks are increasingly recognizing that ESG factors can have a signi cant impact on their risk pro le. For example, environmental risks such as climate change can pose a signi cant nancial risk to organizations that are not prepared. By considering ESG factors in their lending and investment decisions, banks can better manage these risks and protect their own nancial stability.

(iii) Reputation

Banks are often under scrutiny from stakeholders such as customers, regulators, and investors. By incorporating ESG considerations into their business practices, banks can enhance their reputation and demonstrate their commitment to social responsibility.

(iiii) Innovation

Banks that integrate ESG considerations into their business models can create opportunities for innovation and new business models. For example, by o ering green nancial products and services, banks can tap into the growing demand for environmentally sustainable options and potentially gain a competitive advantage in the industry.

(v) Regulatory compliance

ESG considerations are increasingly being integrated into regulatory frameworks, and banks that do not take these factors into account may face legal and regulatory risks. By proactively addressing ESG issues, banks can ensure compliance with current and future regulations.

Conclusion

Given the growing focus on ESG initiatives within organizations –driven largely by consumers, investors, and regulators alike –it is no longer an option but an important consideration for the banking sector and payments industry. Customers are consciously demanding eco-friendly nancial products, regulators are becoming strict about the implementation of ESG practices, and investors are de ning the ESG principles as an important component of an organization’s market positioning and brand image.

Considering this, banks need to take a practical approach towards integrating ESG in their operations. As a next step, banks should develop long-term and short-term strategies to adopt ESG initiatives as well as to monitor ESG compliance. It is also vital for the top management at banks to provide adequate resources to drive ESG-speci c initiatives. De ning and targeting immediate ESG initiatives and tracking them until successful accomplishment along with timely reporting are all crucial components of this endeavor. Overall, de ning the roadmap towards being ESG compliant and proactively taking necessary actions will go a long way for the banking sector and payments industry at large.

Having said that, incorporating ESG principles may seem like an additional nancial and operational burden for some banks and payment rms. However, if entrenched correctly in a company’s culture and business model, it can be an opportunity for the organization to expand shareholder value, along with improving its brand image. Moreover, such a change would make it a part of an exclusive group that supports ESG in the competitive global market. ESG focused nancial organizations have the potential to achieve rapid growth, deliver ESG-focused innovation and attract new customers and investors