ESG explained, and why it’s critical to Helping Britain Recover

Businesses and their financial backers have a crucial role to play in addressing the major economic, social, and environmental issues that are facing the UK today.

As we emerge from the COVID-19 pandemic and look to recover from the damage it has done, arguably these challenges have never been greater or more urgent.

Individuals who have lost their jobs or homes need to be supported to get back on their feet, and businesses need help to recover financially and adapt for the future. The pandemic has exacerbated existing social inequalities, and for the UK to really thrive this needs to be tackled so that opportunities are more widely available and everyone has a chance to succeed. Local communities are at the centre of this, and the importance of support for small businesses, community initiatives and charities should not be underestimated.   

Underpinning all this, we need to respond to the climate crisis by working towards a lower-carbon economy – ensuring a just transition that does not leave large parts of the population behind. At the same time, we must reduce other forms of environmental harm and foster more sustainable businesses. 

There’s also a crucial need to champion diversity and inclusion in the workforce and to drive higher standards of health, welfare and human rights, not just in this country but across global supply chains too.

These are significant, society-wide challenges, and only when everybody works together will real change be accomplished. But businesses and financial institutions are an integral part of the ecosystem and they must play their part.

The business benefits are also clear. Consumers want to buy from ethical companies and the most talented people want to work for them. So it’s not just the right thing to do, it’s also the best way to achieve long-term sustainable returns.

What is ESG, and how is it different to CSR? 

A decade ago, Corporate Social Responsibility (CSR) was the most commonly used term to encapsulate an organisation’s efforts to maximise the positive impact it has on society and the environment.

However, a major limitation of CSR is that it typically refers to a collection of charitable and philanthropic works performed by profit-driven companies in order to ‘give something back’ to the community and environment from which they have benefitted.

This has been superseded to a large extent by Environmental, Social and Corporate Governance (ESG), which takes a more holistic view of a business’s impact – taking into account its core operations in addition to any ‘good work’ they might undertake.

Where CSR aimed to make businesses accountable – but only according to each company’s own self-imposed standards – ESG criteria makes the overall impact of a firm’s activities more measurable.

Why ESG is good business

Strong ESG practices ultimately make for better businesses. They are more sustainable and carry less risk, and for investors that’s aligned with their interests. 

There is no trade-off between values and value – in fact, one supports and enhances the other.

Today, businesses are increasingly being held to account as it becomes easier for customers, investors, regulators, employees and other stakeholders to monitor their activities. At the same time, customers and investors alike are more aware than ever of the need to tackle urgent social and environmental issues.

As a result, companies are under growing scrutiny for more than just their profitability. They must also demonstrate excellent ESG performance – not just through a desire to do the right thing, but also to meet the expectations of stakeholders and retain and grow their customer base. 

There are a whole host of different ways companies can build ESG considerations into their practices, for example:

• minimising waste and energy use across operations
• working towards greater supply-chain transparency in environmental and social areas
• addressing governance areas such as executive compensation
• integrating ESG considerations into products and services
• reviewing recruitment policies to ensure they are inclusive.

Not just undertaking but also reporting on progress against ESG metrics helps to improve a company’s accountability to all its stakeholders.

From a regulatory perspective, the Financial Conduct Authority already requires the most prominent listed businesses to state whether their financial announcements are in line with certain climate change-related criteria and provide an explanation for any areas where they are not. These requirements are only likely to become more stringent as the UK moves towards its goal of net-zero greenhouse gas emissions by 2050.

Investors meanwhile – especially the large institutional funds such as pension funds – are increasingly looking to back sustainable companies that will deliver reliable returns over the long term. Demonstrating responsible business practices is therefore an important way to make an organisation stand out from its competition and attract investment.

There is also a growing body of evidence that consumers are increasingly prioritising ethical and environmentally conscious brands and products, and that awareness has grown following the pandemic. For example, a 2020 survey of 3,000 people across eight countries by Boston Consulting Group (BCG) found that 87% thought companies should integrate environmental concerns into their products, services, and operations to a greater extent than they have in the past.

Added to this, implementing measures to boost diversity and inclusion in the workforce can have a deep positive effect when it comes to attracting and retaining talent, and getting the best performance from people. Working environments that promote health, wellbeing and a good work-life balance are not just excellent credentials when it comes to recruitment, but they also minimise the challenging and costly impacts of high staff turnover and employee burnout.

Helping Britain Recover 

For all the reasons outlined above, it has become undeniable that monitoring and disclosing ESG performance – and investing in improving that performance – is just good business, and the same is true for us at Lloyds Banking Group.

The management of our ESG performance allows us to act as a responsible banking group. Our ESG performance provides a good foundation for considering how we can leverage our core capabilities as a diversified financial Group and set ambitious commitments in areas where we think we can have the most impact on some of the UK’s societal challenges.

We recognise that our performance as a business is inextricably linked to the wider economic success of the UK, and so it makes commercial sense for us to do everything in our power to support this: helping businesses and households to recover, adapt and grow, while contributing to an environmentally sustainable and inclusive future. 

One of the greatest threats facing society now is the climate crisis, and helping to tackle it will require new ways of living, working and investing for our business and our customers.

As we move towards the net zero 2050 target, the decades ahead will have to see major changes – how we generate power, how we travel, and how we build homes to name just a few.

Inevitably this is creating a need for many businesses to transition to ways of operating that create fewer emissions, and for individuals to consider lifestyle changes. Climate change therefore represents both a risk and a real opportunity.

We’re committed to supporting our customers to achieve the agility they’ll need for this transition, and we’re uniquely placed to work with all sectors and all parts of the UK as we pivot our economy to a more sustainable position. 

We've committed to increasing our green finance funding for commercial banking to £5 billion, and have also launched several green finance propositions for our commercial clients, as well as our mortgage and motor finance customers.

Meanwhile, the global pandemic has taken a significant toll on the UK economy and the years ahead will be crucial in getting things back on track.

Given our unique position at the heart at the UK economy, we understand that we have a key role to play in driving this national recovery by supporting our customers through what is, for many, still an extremely challenging period.

Since March 2020, we have supported more than 350,000 businesses with more than £13 billion through the various government COVID-19 funding schemes, to help firms across the UK survive the pandemic and recover.

This has allowed hundreds of thousands of businesses to pay employees and suppliers throughout the hardest parts of the pandemic, not only protecting the companies themselves but also the communities that depend on them.

All of the support we provide is guided by our long-standing purpose of Helping Britain Prosper. And as the economy bounces back from the impacts of the pandemic, our aim in 2021 has been to Help Britain Recover – focusing on five areas where we can make the most difference.
 

The events of the past 18 months have laid bare just how closely our social and economic prosperity are linked to the wider environment. We know that successful businesses cannot exist in isolation from their communities, and that’s why we’re integrating ESG into every part of how we do business.

Find out more about ESG at Lloyds Banking Group