Features | 20/06/22

Increasingly members will have heard more about the importance of thinking about ESG – Environment, Social, and Governance issues.

The CCTA was delighted to take part in Credit Strategy’s recent Car Finance Conference and to meet some of our members. I was asked to join some of the panel sessions and the debates. One of which was the discussion about how lenders approach ESG.

Some of you may already be thinking that it is time to move on to the next article. However, even if you believe that this is not an issue of personal interest, there is one good reason why you should keep reading. These ESG issues are of increasing interest to people that are important to firms.

It is a truth that drives much of our work, that our success or failure, depends on our relations with others – customers, investors, suppliers, and regulators.

One of my fellow panel members pointed out that in a recent discussion with investors, the second question was focused on what the firm’s approach was to ESG.

These concepts are not new. Go back fifty years and there was discussion about the impact of industry on the environment. At one stage we were all very focused on corporate social responsibility. You can trace it back to social pioneers like Robert Owen, who built New Lanark just a few miles from where I live.

But in the business schools and board rooms, the ideas of Milton Friedman were very popular. He proposed that the primary responsibility of a company is to the shareholders. For many years that idea was king.

Now, our regulators increasingly place a focus on social issues. We have seen a push towards more diversity amongst leadership and the directors of companies. They want to hear more about how we treat staff and also how we allow people to be more authentic.

I recently read a piece by Equiniti saying that almost half of borrowers think that green credentials are important. There is support for lenders to think about who they lend to, and even whether they give better rates to those with sustainable aims.

The question that was being discussed at the Conference is how do lenders approach this world of ESG? This was especially interesting when thinking about the car industry, which poses questions about environmental impact.

There is a temptation to sign up for audits and checklists that have been developed elsewhere. Of course, that might be helpful, but we are at risk of not thinking this through for ourselves. There are a number of traps or misconceptions that I have seen with other firms.

Simplifications of what diversity is. Or accepting current wisdom around environmental impacts. For example, in the used car world, running second-hand cars will probably be less green, and less environmentally friendly than running a new car, but what are the costs of building a new car?

What are the environmental impacts of mining those components? We are increasingly using more precious metals in electronic parts, often mined in unstable areas of the world. There are the costs of moving those around the world, the energy involved in the production too.

I think the starting point is for leadership to discuss what their position is and what they can do. That in itself is an example of good governance. And I will place Governance to one side to move on.

Because there is also the Social in ESG. What is the social benefit of having access to used cars? How many nurses, and other NHS staff are traveling in used cars to get to hospitals and clinics when public transport wouldn’t work for them, and they couldn’t afford a new car?

How many people in rural settings, possibly vulnerable people, need a car to avoid isolation? Access to a car is access to work, education, public services, and friendships.

So, our advice to our members is not to ignore ESG. This is something that is more important to the business world, especially to investors. Politics has become greener. Our regulators and the general public are asking more questions and expecting the right answers.

Sit down and have a look at what the expectations are and what it means for you. Develop an approach that works for you. Don’t just accept the wisdom of others. Build your narrative around ESG.