Sustainability 2.0: Navigating Climate Governance Challenges

Facing up to a new sustainability challenge

Sustainability regulations have always been idiosyncratic in nature, but differences across global markets are becoming more pronounced, and even potentially conflicting in some instances.
Whilst Asian markets have been fairly consistent in terms of their regulatory approaches towards sustainability, the situation is less stable in other parts of the world, and this is creating challenges.
“In a handful of Western markets, ESG regulations or sustainable business incentives are being reviewed, such as the US Administration’s decision to freeze the disbursement of funds under the Inflation Reduction Act¹,  a piece of legislation which supported investment into green infrastructure projects such as clean energy and transportation,” said de Drouas.
In addition, the EU which has always been a progressive force on sustainability and ESG, has relaxed a few of its ESG rules, following some criticism that the provisions were too prescriptive and burdensome. Nonetheless, the EU is still fully committed to the green agenda,
“The European Central Bank (ECB) and the European Banking Authority (EBA) are taking a tough stance on sustainability, requiring banks to factor in climate-related and environmental risk into their risk assessments, including credit risk. On the other hand, the European Commission (EC) issued a proposal in the Omnibus Directive which aims to simplify the sustainability reporting under the Corporate Sustainability Reporting Directive (CSRD) and the new due diligence Directive (Corporate Sustainability Due Diligence Directive),” commented de Drouas.
Compounding matters further is that market practices around sustainable global transaction banking are not mature yet, creating another layer of complexity for banks and their clients.  
“As a global bank with a presence in more than 50 countries, Societe Generale needs to make sure it is fully on top of these different requirements or market practices. We have developed a framework to label Global Transaction Banking products as Green or Social. This approach uses – as its backbone – the EU Green Taxonomy, but this can sometimes be difficult to impose outside of the EU. We therefore consider local practices and regulations, and adjust our approach accordingly, whilst keeping a stringent minimum common standard,” continued de Drouas.  This sort of flexibility is critical if banks are to successfully navigate the different ESG regimes.

Taking clients on the Sustainability Journey

Just as banks are having to refine their business models as they prepare for the transition to net zero, so too are their clients. 
It is here where banks can play a vital support role.
de Drouas noted that banks - such as Societe Generale - have engaged with clients on ESG matters for a long time now, with an emphasis traditionally on how they manage and mitigate ESG risks and ensure that their sustainability practices are mature and coherent with their banks’ ESG commitments. Simultaneously, a number of banks have spent the last few years supporting their clients with the integration of ESG into their financial strategies through sustainable financial services. 
However, subtle changes are afoot.

We have entered a new era in terms of client engagement, where we discuss the transformation of our clients’ business models, their transition and adaptation strategies, and some of the challenges they may encounter when financing those transformations. To support this, we have developed an in-house tool – The Transition Opportunities Potential – to assess clients’ transition strategies, according to de Drouas. 

Instead of concentrating on just narrow sectoral challenges, banks are focusing on transforming the entire value chain.  “Take the aviation industry’s efforts to decarbonise – at Societe Generale, we do not just speak to the airlines or airports. We are engaging with the oil and gas industry too, to support them with their development of sustainable aviation fuel. Change programmes of this scale will require all the relevant actors to be sitting around the table,” continued de Drouas. 
One of the biggest issues is that whilst ESG and sustainability are compelling long-term plays, some organisations will make their investment decisions based on short term time horizons. 
The reality, however, is that organisations which choose not to embrace sustainability are putting their future business at risk. “One of our clients in the alcohol sector told us they have been replacing their grape vines with drought resilient vines over the last decade. This move is not necessarily profitable in the short-term, but it will protect their business from the effects of climate change in the long-term,” said de Drouas.   
ESG and sustainability may be facing a few headwinds in some markets, but the risk of doing nothing is simply too great, for banks and clients alike. Those banks, which support clients on their climate transition journey will be the ultimate winners moving forward. 
^{1White House – January 20, 2025 – Unleashing American Energy}