ESG in Development Finance
The detrimental effects of climate change and persistent social injustices around the world continue to pressure financial institutions to demonstrate their commitment towards sustainability. By nature of their public mandate, National Development Banks (NDBs) are obliged to drive inclusive sustainable development through their key role as an intermediary and financial provider. How they manage risks and opportunities around environmental, social and governance (ESG) issues has a direct impact on their access to capital and the ability to facilitate economic activity. But as with most institutions aiming to be ESG-compliant, the focus has been on environmental issues, with commitments around social issues appearing to be a formality.
The question is — to truly work towards sustainability, can NDBs really afford to sideline the S?
We Cannot Lose Sight of the S
The risks associated with climate change have intensified the focus on the environmental factors of the ESG framework. The potential economic and financial losses resulting from the various transitional and physical risks have prompted the establishment of rules and regulations on the disclosure of climate risk management around the world.
With the hyper focus on environmental risks, investors also need to be aware of the social risks to protect their investments and ensure consistent returns can be sustained in the long term. Social factors such as labor strikes and consumer protests, as well as product safety and changes in consumer behavior, all pose risks to business operations. Social issues have the potential to lead to political instability which could disrupt supply chains and operations. Among others, oil and gas companies face higher levels of exposure to social factors that can result in political conflict and even physical damage from civil unrest.
The lack of a common international standard for ESG, particularly for the ‘S’, leaves us with varying efforts across the components. Notable initiatives to achieve harmonization include the establishment of the Global Reporting Initiative (GRI) Standards, the International Sustainability Standards Board (ISSB), and the release of the 2021 EU Sustainable Finance Disclosure Regulations. While these initiatives settle in, the enormous funding made available for environmentally compliant institutions and green investment has created an obsession that sidelines the social aspect of sustainability.
A Key Aspect of the ‘S’
It is essential to note that globally addressing the ‘S’ is complex, partially due to different approaches countries use in managing social factors. To determine priorities, an assessment of social issues and stakeholder priorities is critical. Social issues left unaddressed can present significant risks to financial performance; yet efforts in the social component linger around a box-ticking exercise for diversity and inclusion. A key part of addressing the social aspect of ESG, is in understanding the varying impacts of social issues on men and women.
The Covid-19 pandemic exacerbated issues of inequality and poverty, particularly in gender equality. The global female work force participation rate stands at 50% compared to 80% for men, with women less likely to be formally employed, benefit from career progression and develop their businesses. This results in women having the reduced ability to contribute to national and global economies. A study by the World Bank estimated a loss of global human capital wealth due to gender inequality at USD 172.3 trillion. Addressing gender equality aims to reduce inequality and poverty but also contribute to national and global GDPs.
According to Convergence, 25% of blended finance transactions target gender outcomes. Therefore, NDBs that mainstream gender can attract funding on more attractive terms from international donors. Institutional gender mainstreaming provides full alignment to the public social mandate of NDBs, allowing them to push beyond the minimum requirements and effectively address development challenges for men and women in their societies. The following key actions would reel the S into focus for enhancement: 1) institutional gender strengthening and 2) incorporate a gender analysis at the transaction level by integrating gender in ESG assessment criteria.
- Institutional Gender Mainstreaming: A Holistic Social Approach for NDBs
By institutionalizing gender mainstreaming, NDBs will be able to understand how their existing corporate policies, strategies, structures, and processes, as well as resulting products and services have different impacts on men and women. Mainstreaming a gender perspective in both internal and external aspects of the bank will allow a comprehensive review and reform on the bank’s performance with the social factors. The result: improvements in participation and equity of both internal and external stakeholders.
Numerous development banks have made strides in advancing gender equality, with 36 banks being signatories to Paris Development Banks’ Statement on Gender Equality and Women’s Empowerment. A 2021 report by UN Women, details the various practices and measurement frameworks used by selected development financing institutions as they work towards gender mainstreaming in their internal and external operations. Prominent industry frameworks are being used to measure commitment, such as the 2x Challenge Criteria and the Women’s Empowerment Principles (WEP) are commonly used by Development Finance Institutions (DFIs) supporting the private sector. These industry frameworks allow for unified definitions, alignment, and benchmarking across institutions. With continued efforts to improve disclosure of targets and progress, momentum would see NDBs move towards improved transformative action.
- Gendered ESG Investing: The GEM Framework
Gendered ESG investing is a unique way for investors to assess the gender performance of companies and projects using an ESG lens. Developed by MEDA, the GEM Framework encourages investors to integrate a gender analysis in the ESG assessment criteria. The aim of the framework is to promote equity while supporting business growth and impact. NDBs could use gendered ESG investing to review their portfolios for a comprehensive assessment of the three aspects of sustainability.
While challenges in ESG standards and compliance are an issue, the ‘S’ has generally been sidelined as the world obsesses over the ‘E’. As catalysts for inclusive sustainable development, NDBs have the unique mandate to address the ‘S’ by using a gender mainstreaming approach. This approach allows NDBs to improve participation and equity of men and women as employees, clients, suppliers, leaders, and business owners, for sustainable impact in their societies. A more holistic way to address the S while safeguarding and ensuring sustainable returns on investments.
In recognizing the importance of this, Momentus (formerly IFCL) has developed a gender mainstreaming assessment tool that will be launched this September 2023, at this year’s Finance in Common Summit.