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Lindsey Hall: Hi. I'm Lindsey Hall, Head of Thought Leadership at S&P Global Sustainable1.

Esther Whieldon: And I'm Esther Whieldon, a Senior Writer on the Sustainable1 Thought Leadership Team.

Lindsey Hall: Welcome to ESG Insider, a podcast hosted by S&P Global, where we explore environmental, social and governance issues that are shaping investor activity and company strategy.

Lindsey Hall: As awareness grows about environmental, social and governance issues, the role of the Chief Sustainability Officer is taking on greater importance at many companies. In the ESG world, I'm hearing increasing discussion about where the CSO should sit in an organization, who the CSO should report to and just how to differentiate between the role of the Sustainability Officer and corporate social responsibility. In some ways, the rise of the CSO is embedding sustainability across organizations. 

Esther Whieldon: In today's episode, we're going to dig into this topic by looking at a new report about how CSOs are driving the banking sector's push to become more sustainable. 

The report was jointly published in June 2022 by audit consulting and advisory firm, Deloitte, and the European Banking Federation, which is a trade group. The authors of the report surveyed 28 banks to find out more about their CSOs work and the role they play in their organization. The banks are based throughout Europe, range from smaller to larger lenders, and have different business models. 

This episode is reported by our regular contributor, Jennifer Laidlaw, a Europe-based member of the thought leadership team at S&P Global Sustainable1. Here's Jen, first up talking with Francesca Messini, a sustainability leader at Deloitte in Luxembourg and one of the authors of the report.

Jennifer Laidlaw: Well, Francesca, thank you very much for agreeing to take part in the podcast. And I want to get some idea from you in the beginning what were the main findings of the report.

Francesca Messini: In a nutshell, we can say that the CSO, or the Chief Sustainability Officer, is not anymore a nice to have role, but is a must have and has been proved to be essential to steer the sustainability strategy and the commitments that the banks are taking. So the real impact of having a CSO, it's really to help the bank in making this change and in complying with the various regulations around ESG that are quite a lot for the moment in making sure that all the internal target and the internal commitment that the banks are taking really can be made possible, thanks to a role like the one of the CSO that is acting really as a change agent and as an orchestrator of all the activities that have to be done. 

Jennifer Laidlaw: I also spoke to Alexia Femia, Sustainable Finance Policy Adviser at the European Banking Federation, and asked her what impact a Chief Sustainability Officer can have on a bank strategy.

Alexia Femia: CSOs are very different and distinct from CSR, so from corporate social responsibility functions. But this makes a lot of sense because sustainability really means also abandoning business as usual, having a clear organizational purpose, a new attitude, a bit of a holistic approach across all business lines. So while, for instance, CSR activities contributing to societal goals have often been complementary, let's say, to pre-existing bank objectives, sustainability requires more of the integration of environmental and social objectives into the core business of a bank. So this really requires aligning the entire strategy of the bank with the ability to achieve positive impact.

But we looked at some other very interesting elements as well, such as the priorities of the CSO, which is quite relevant, but first and foremost, setting the sustainability strategy, of course, providing learning opportunities. So this is within, of course, the structure of the bank. So for employees, having more awareness on what sustainability is, how it impacts the banks and bank's clients, and of course, engaging with external stakeholders as well. 

Jennifer Laidlaw: She then went on to detail some of the challenges facing CSOs. 

Alexia Femia: We see that there is a lot of consensus around these different sustainability leaders with regards to what the main challenges are in the short-, medium- and long-term. But what we have seen, and we weren't exactly surprised is that data still is and is expected to remain in the medium term, the biggest challenge, impacting banks’ ability not only to develop services, meaning customer needs, complying with regulatory requirements, ESG standards and perform an index analysis of the bank's portfolio. 

Then we have lack of standardization between the multiple regulatory and voluntary reporting systems and frameworks. So something that a lot of the CSOs we're calling for or the sustainability leaders we're calling for is more comparability of the -- within the regulatory landscape. And then finally, a huge challenge is the interaction with external stakeholders, whether it be with the Civil Society Organizations or, of course, readopting the way that interaction also occurs with clients, so helping them understand new sustainability of sustainable related, let's say, financial products and services.

Jennifer Laidlaw: You mentioned the data challenges for banks. What would you say are the main priorities for a CSO? Is it data? Is it climate? Is it social? And how does that differ from bank to bank?

Alexia Femia: So I would say, first and foremost, the main areas of focus in the sustainability strategy for a specific bank depends very much on the business model of the specific bank and the specificities because, of course, depending on where the bank is located, who their clients are, their priorities can differ greatly. 

If we look at whether the focus is more climate or social, banks are focusing on where they can make the biggest impact and determining where they want to focus, sometimes banks will look at the UN sustainable development goals, for instance, and we see this also in our report, and we use this as a sort of point of reference to understand where they're focusing their efforts.

And we saw that most of them are focusing on -- those who use sustainable development goals as a, let's say, as a point of reference. -- have climate action amongst their main priorities. And this isn't just for no reason, of course, it's because it's where the regulators and supervisors have been focusing first and foremost and where there is the most pressure. 

But it's also where banks can have the most impact and from a data perspective, I wouldn't say it is easy in any way to get data yet on these aspects because we don't have mandatory disclosures for most known financial institutions yet from the ESG perspective, but it is still where banks can have the biggest impact and assist their clients in their transition. Whereas for instance, although social can be a big priority for some banks, it is still very difficult to gather information on this because it's not as tangible, and it's difficult to have quantitative data to use of the threshold, as you would, for instance, maybe more with climate. But in due time, this will become better potentially.

Jennifer Laidlaw Alexia told me only about 20% of banks surveyed actually use the Title Chief Sustainability Officer. Titles can range from group head of sustainability or head of sustainable development. That made me wonder how the role of CSOs differed between banks. Here's Francesca again.

Francesca Messini: Let’s say there are some common elements that we see across the banks that participated to the study. So first of all, this role of an agent in changing. So really making sure that the commitment that the bank is taking or the requirements that have to be implemented are really put in place and here. So it's common to have someone like the CSO taking this role. And therefore, as a consequence, the other common element was having the CSO as an orchestrator or I can even use the term of glue. So being really the one connecting the connecting point between all the department divisions of the bank to make it as possible.

And this is proven even during the first study that's very important because the sustainability, it's a transversal topic. It's a topic that is impacting various department of the bank from the front office to the middle office to the back office to the all the control functions like the risk, the compliance, internal audit and so on. Therefore, a coordinator and someone that can connect all the various elements, it's really important.

Jennifer Laidlaw: Is it generally that the CSOs are sitting on the Board with the Chief Executive?

Francesca Messini: Let's say, that's a question that we have not explored strictly. However, based on the interviews we can say, reading between the lines, that having more higher the CSO in the hierarchy, the better it is to make the integration of sustainability into ESG more effective. So it's having a CSO in a senior role, a leader, one of the leaders together with the various C-level within the C-suite is definitely important in order to pass the message and to make the commitment very effective.

Jennifer Laidlaw: Right. And did you give any sense of where the CSOs come from? Are they people that have already been working in the company? Are they hired from outside or are they people that are already have been in management?

Francesca Messini: Indeed, there is a different approach. There is roughly 20% shows that basically had similar position in the past. Other they identified on someone internal, so an internal person that has been appointed in order to have the insider knowledge of the organization that helps, obviously, you need to interact and coordinate a lot with the other departments. So let's say, it's a bit of mixture and depends quite driven by the single organization and the single bank. It can be both can be recruited outside or someone that appointed internally.

Jennifer Laidlaw: And I wanted to know just you were speaking a little bit before by the fact that they are the glue between other bank departments. Are there bank departments that they're working more with than others, for example, a risk department?

Francesca Messini: Yes. I would say risk is definitely we see a high connection between the risk of CRO and the CSO given the fact that there are more and more specific requirements and the need to investigate climate environmental risk, at least for the moment, and therefore, the need of the 2 to connect. I see quite as well the interaction between -- of the CSO with more investment side because even if the CSO is not expected to create a sustainable product, at least it can have an important role in giving the necessary element to the investment team to create products that are sustainable. 

I see as well a link of the CSO with department -- other departments like the CFO to complement the financial reporting with sustainability information or nonfinancial KPI and therefore, the importance of the interaction between the CSO and the CFO, at least, let's say there’s one. But we should not forget as well the role that the CSO and the interaction that this can have with external parties. And when I say external parties is mainly for sure, the communication, the stakeholders, the clients, but as well the NGOs. And so all the more internal sustainability and the impact that the bank can have on the society and therefore, the role that the CSO can play towards the NGOs.

Jennifer Laidlaw: And I think working with the CFO is kind of an interesting aspect. And what should be the relationship between a CSO and a CFO since ESG issues can have a material impact on a bank's financial situation?

Francesca Messini: Yes. Indeed, the sustainability strategy should be defined keeping in mind that there are indeed financial objective and vice versa. So the CSO and the CFO should really be interacting and feeding each other. It's become even more true when performing the materiality assessment that is crucially in the exercise of sustainability. And what is material for the bank in that it's definitely linked to the business, to the financial aspect. So the 2 things have to be linked and even all the sustainability commitments have a clear role in for the CFO. So the 2 have to speak. And more and more I would expect, and this is something that has been confirmed as well, they will work closely work closely given the fact that there are new directives that will come and that will request that the 2 will work together to produce the outcome that is requested by the regulation. 

Jennifer Laidlaw: It's interesting that you looked at banks. Was there any specific reason why you decided to focus on the banking sector and not another sector? 

Francesca Messini: That is mainly given the fact that the regulations are quite advanced for such sector. We believe that would have been a sector to start with, but it can be -- could have been done even for the other sectors. As you may know, there are quite a lot of regulatory initiatives that are currently ongoing that are impacting banks on various levels and depending on the specific business, but there is quite an intense agenda on a regulatory agenda. So it's a priority for them as well.

Jennifer Laidlaw: And did you get any sense from doing the report what the role of the CSO might be in the next 5 years?

Francesca Messini: The outcome here and the current situation is that maybe in a few years, there is no need any more for a CSO, as such, because there is the purpose to integrate each of those at the C-Suite level is a CSO person. So this year, the sustainability activity will be embedded in a various -- across the organization automatically. So it will be really that's the idea. And therefore, maybe in a few years, there is not a need anymore to have a dedicated function like the one of the CSO that we are seeing here now emerging quite a lot. 

Jennifer Laidlaw: Given the report focused on banks, I wanted to know what role the CSO played in creating new business opportunities for lenders, for example, in green lending or launching ESG-related projects. Here's Alexia.

Alexia Femia: Yes. So CSOs are not very much involved in the implementing on a practical level so on an operational level. The CSO has more of a role in, let's say, developing the overall arching sustainability strategy. Then when it comes to the operational tasks, this is more in the hands of the relevant departments. For instance, it could be the lending department. So in other words, they're not in charge of developing new sustainable products or designing clients offerings, but they are a point of reference for the department that does instead work on this. So for this reason, we say that the CISO also plays this fundamental role of orchestrator within the bank having to coordinate relevant areas to harmonize the implementation of her or his sustainability strategy for their bank.

Jennifer Laidlaw: And in terms of lending, I mean, how can they sort of maybe influence the bank's lending to ensure, for example, that they're not -- they're reducing their lending to fossil fuel companies. I mean do they have that kind of influence?

Alexia Femia: This is a tricky question. So this is not something we cover specifically in the report. And of course, it has an influence because the CSO has the power of basically establishing what is the sustainability strategy for the bank. And this can, in practice, mean a lot of things. 

Now the focus on banks is increasing more and more -- and when we talk about sustainability for a bank, sometimes people focus or lose focus, let's say, of what that means in practical terms. Of course, a bank that intends to become more sustainable, it doesn't mean they're going to put solar panels on the roof of their branch or somewhere. It means looking at their lending portfolio or their portfolio in general and seeing where they can green their portfolio, help their clients, assist their clients in their transition. And that brings back to one of the biggest struggles at the moment, which was data, and it's something I mentioned earlier because financial institutions are really looking to get this further ESG data from their clients in order to be an enabler in their transition to becoming more green. And I think that is where banks have the biggest impact.

Jennifer Laidlaw: So what do CSOs see as their future challenges as time goes on?

Alexia Femia: Going forward, what we can expect to see is that there will continue to be challenges for the CSO with regards to the regulatory landscape, which currently is quite complicated. But we don't expect it to become simpler in the future because there will be more elements embedded. And of course, we'll see social growing in prominence. So that will be something that we'll have more and more focus on as well. 

Then I think another very important challenge that is being faced now, but it will continue in the coming years is managing the high expectations of external stakeholders. So this is being handled by CSOs already with constant engagement, trying to also help understand externally what the main challenges faced by financial institutions are, how they implement their sustainability strategies, what type of targets they're trying to reach, why it takes some time, and it's not something that can happen from one day to the other. 

And another huge challenge is that sustainability is more and more embedded within the structure of the bank. So you'll have the CSO, which okay, will be a point of reference, have a sustainability strategy, but they will have to more and more be able to seep into the various branches, if I may call it that, of the bank. And I don't mean branches as in the -- what we normally refer to when we speak of branches and banks. But if you visualize a tree, the different areas, let's say, of the bank and help understand the overarching issue of sustainability, why it's relevant. And then see how this has to be implemented then in practice through the operational, let's say, more operational aspects of banking.

Lindsey Hall: Jen, it was interesting to hear in there what Francesca has to say about the evolving role of CSOs and how they might not be necessary in the future as sustainability becomes just part and parcel of bank strategies.

Jennifer Laidlaw: Yes, that will certainly be something to look out for.

Esther Whieldon: Well, we'd love to know if some of the same trends that you're talking about here are happening in other sectors. So please do let us know if you hear anything...

Jennifer Laidlaw: Absolutely. I certainly will.

Lindsey Hall: Thanks so much for listening to this episode of ESG Insider and a special thanks to our producer, Kyle Cangialosi. Please be sure to subscribe to our podcast and sign up for our weekly newsletter, ESG Insider. See you next time.



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