However, the recent devastating impacts of climate change have become more prevalent and is resulting in a renewed focus on the issue of sustainability. In addition, the Biden administration has made clear that good faith efforts on the topic of climate risk are no longer sufficient and the time for action is now. This mainstream momentum coupled with the policy agenda of the new administration’s ambitious climate agenda looks to create pressure for organizations such as financial institutions. As such, financial institutions should begin the process of assessing their own ESG initiatives & activities and make improvements proactively before mandated compliance threatens to disrupt the business-as-usual operations of the sector as a whole.
How Did We Get Here?
In 2005, the United Nations published a series of principles known as the UN Principles for Responsible Investment (UNPRI), which would encourage signatories to incorporate non-financial factors such Environmental, Social and Governance (ESG) into their investment practices and day-to-day business operations in order to contribute to the development of a more sustainable global financial system that would work to create long-term value for society.
Not only did the UNPRI introduce the term and concept “ESG” to the mainstream, but it also signified the beginning of the role of sustainability in the minds of consumers, investors and regulators, following increased awareness around the catastrophic devastation caused by climate change.
Since the introduction of UNPRI, global financial institutions have worked to craft and deploy ESG-themed initiatives to demonstrate their commitment to the future of sustainability. In addition to UNPRI, the UN also developed The Principles for Responsible Banking , a similar set of guidelines that tie signatories to an ambitious sustainability framework. So far, over two hundred and forty financial institutions globally have pledged to meet these standards, demonstrating a vast global commitment to work towards reducing environment impact. This international collaboration was bound to arrive in the US banking ecosystem.
In the US, climate change initiatives in have historically been encouraged via tax breaks and other various incentives, as well as amplified by internal factors such as brand building. However, these efforts have been more aligned to positive publicity and recognition for being viewed as “first movers”, rather than invoking long-lasting, meaningful change. In fact, according to the Carbon Disclosure Project’s inaugural 2020 climate change questionnaire, data shows that less than half of disclosing financial institutions report that a transition plan was in place to successfully achieve net zero emissions.
This past January, following the commencement of Joe Biden, the 46th President of the United States, it was clear that climate change, sustainability and other ESG-centric topics were at the forefront of the new administration’s agenda given the series of environmental catastrophes that were affecting countries worldwide; the Atlantic hurricane season was the most active on record, temperature records globally were regularly being shattered, and bush and forest fires were impacting several countries including the US, Australia and Russia. These events only heightened the US’s urgency to become catalyst of change for climate change, which if left unchecked, could have dire consequences
Then, in May 2021, President Biden’s plan was put into motion. His approach, notably, did not include idealistic promises that have been thrown around in the past, which lifted spirits temporarily but in reality, provided little to no recourse. Instead, he placed accountability firmly on financial institutions, issuing an Executive Order on climate-related financial risks. This order outlined several initiatives that would influence policies combatting risks that climate change poses on publicly-traded securities, private investments, supply chains and the sector as a whole. Broadly, this order put forth the following priorities:
- Develop a whole-of-government approach for mitigating climate-related financial risk
- Encourage financial regulators to assess climate-related financial risk
- Bolster the resilience of life savings and pensions
- Modernize federal lending, underwriting, and procurement
- Reduce the risk of climate change to the federal budget
Particularly the second priority to “Encourage financial regulators to assess climate-related financial risk” to mandate that the Treasury Secretary, work with the Financial Stability Oversight Council to assess climate-related financial risk to the stability of the federal government and the US financial system. The priorities outlined in this Executive Order served as the foundation for potential regulatory and supervisory oversight of US financial institutions extending to sustainability-related disclosures and metrics.
Following the issuance of this Executive Order, the House Financial Services Committee advanced legislation this past June that would require US Global Systemically Important Banks (G-SIBs) to present the Federal Reserve with detailed, annual reports about various ESG initiatives and activities. These reports would require data and metrics on the organization’s size and complexity, their approach to cybersecurity, the diversity of their board of directors and the organization’s actions taken to mitigate climate risk, amongst other things.
If passed, financial institutions would face new challenges related to how they will collect, compile and report on various ESG activities. However, even if this particular piece of legislation does not become law, its proposal will not have been in vain. This bill signifies one of the cornerstone priorities of the Biden administration – mitigating the risks associated with climate change by holding the private sector accountable.
Where Are We Now?
Today, we stand at an inflection point. A seemingly never-ending chain of environmental catastrophes coupled with a new administration’s desire to stay true to its campaign promises has created a sharp rise in awareness, urgency and willingness to act regarding the numerous threats climate change poses.
Political instruments such as tax breaks and incentives, which were once considered effective motivators, are no longer enough; and the occasional positive publicity and media recognition does little to motivate financial institutions to address the drastic actions required by them to become net zero emitters of carbon dioxide. The reality is that the environmental effects scientists have predicted in the past are now occurring: sea levels are rising, sea ice is disappearing and heat waves are becoming longer and more extreme. Now, the Intergovernmental Panel on Climate Change (IPCC), which is made up of more than 1,300 scientists from the around the globe, forecasts a temperature rise of 1.3 to 5.5 degrees Celsius over the next century, and organizations can no long wait on the sidelines. The time has come for action. Sustainable business practices, which where were once viewed as “nice to haves” have evolved into necessities.
Fortunately, President Biden has ushered in an agenda heavily focused on climate change and large organizations are feeling the pressure as they anticipate additional taxes, inquiries from investors, expectations from consumers and requirements from regulators. Since Biden took over, the private sector proactively launched several ESG initiatives with a focus on sustainability. From the establishment of JPMorgan’s specialized industry coverage team known as ‘Green Economy’ to Bank of America’s publicly stated goal of deploying $1 Trillion through its Environmental Business Initiative by 2030, it’s clear that the new administration has sparked a renewed focus on environmental sustainability issues among large corporations, particularly those in financial services. The SEC has built on this momentum as well, establishing a Climate and ESG Task Force in the Division of Enforcement, which will develop initiatives to proactively identify ESG-related misconduct.
Despite this progress, a lack of harmonized ESG reporting remains due to the presence of multiple frameworks, methodologies and scoring systems, all of which complicate the task of reaching a consensus amongst the international community on what “good” looks like. As is, scores can vary significantly between frameworks, thereby losing their insight value. Some of the most common ESG frameworks used today are:
- The Global Reporting Initiative (GRI)
- United Nations Sustainable Development Goals (SDGs)
- Morgan Stanley Capital International
- The Sustainability Accounting Standards Board (SASB)
Globally, regulators have called for greater consistency and transparency among the various ESG standards and frameworks. For example, earlier this year, the International Financial Reporting Standards (IFRS) Foundation Trustees published proposed amendments to the Constitution of the Foundation to accommodate the formation of a new International Sustainability Standards Board (ISSB). The new ISSB board, which is on track to be formally ratified by the Foundation Trustees ahead of the November 2021 United Nations COP26 conference, will work with global organizations to establish an expert, consultative committee within the IFRS Foundation’s existing governance structure.
Given the amount of recent mainstream attention we’ve seen regarding climate change and sustainability-related issues, it is safe to assume that for financial institutions – this is only the beginning. New reporting requirements and regulations will force financial institutions to adapt to a regulatory environment where there are penalities associated with non-compliance, as well as heightened reputational risk resulting from negative publicity and brand damage.
What Does This Mean for Financial Institutions?
The time is now for financial institutions to approach their ESG initiatives & activities proactively. The reality is simple – an increase in regulatory oversight coupled with growing pressure to hold the private sector accountable is driving the need for urgent innovation and action. At a minimum, financial institutions would be prudent to proactively assess their strategies, data, governance, reporting and disclosures as they relate to climate risk and sustainability.
At Capgemini, we strongly believe that those organizations that embrace the following principles are positioned to reap benefits from the current flux in the industry:
Change as an Opportunity
As new policies pressure organizations to expand ESG responsibilities, resulting in the allocation of additional resources, it becomes common for the initiative to be perceived as a compliance exercise. Organizations that can view ESG from a value-creation lens are able to improve their own bottom line as a result.
Leverage ESG Ecosystem: Orchestrate Use of Critical Data.
Reporting-wise, the biggest challenge for Financial Institutions is accessing the data required for the industry’s reporting standards. Those organizations who view ESG as a team-sport and those that can leverage, collaborate, and help grow the ESG Ecosystem across the industry benefit from fewer operational bottlenecks and reach more effective solutions.
Optimize Governance Structures
Organizational priorities vary based on the nature of their business as well as their ESG program’s maturity. However, organizations that fully evaluate their priorities and optimize their organizational structure in a manner that accomplishes an optimal level of buy-in and resource allocation, can effectively scale their program as their mandate evolves.
Learn from Countries That Are Further Along
When it comes to determining how to transform your sustainability organization, it is not necessarily recommended that companies re-create practices from scratch. In most cases, it is advisable to understand how organizations located in countries that are further along in implementing sustainability regulation have organized. Recently, several European financial institutions have served as effective examples of how to adapt sustainability practices in the face of heightened regulatory pressure.
Ultimately, there is “no one size fits all” approach to becoming a sustainability leader in the financial services sector. However, the importance of understanding that ESG has become a “must have” in the eyes of investors, consumers, and regulators, cannot be understated. Going forward, ESG initiatives around topics such as net zero transition strategies, KPI reporting and green IT adoption will become critical as private sector leaders such as financial institutions plan for the next phase of tackling climate risk. And although the lack of consistency across available frameworks present today can induce uncertainty, it is important to be proactive and welcome change – change of which is all-but-certain to present itself in the coming years.
Who We Are & How Can We Help?
At Capgemini, we have a strong track record of Transformation in financial services, and are actively advising our clients on ESG topics including sustainability, Green IT and Corporate Social Responsibility.
We believe that financial institutions failing to adapt their approach to sustainability will struggle with the economic realities that will present themselves in the late 2020s and 2030s. Unfortunately, the path to achieving ESG targets isn’t always clear or straight, given the pace of flux in the regulatory environment, therefore it is helpful to seek-out expertise.
We offer services that we identify are critical to execute a sustainability program that realizes the ambition of our clients vision:
Strategy & Transformation
- Purpose, vision and ambition definition
- Maturity diagnostics
- Program roadmap development
- Ecosystem partnerships
Green IT Adoption
- IT Vision & objective setting
- Technical diagnostics (infrastructure, applications and equipment, project mode, etc.)
- IT Transformation
- KPI Definition (reporting, management, risk monitoring, etc.)
- Data collection & governance
- Integration of ESG criteria into decision chains (including risks)
- Automation of dashboard and reporting
- Implementation of control/trajectory model
Responsible Operations & Process Improvement
- Operating model transformation
- Integration of sustainability into operations
- Lean sustainable process optimization
- Sourcing strategy
- Sustainable real estate strategy
Additionally, we have also recently launched a new sustainability offering focused on empowering our clients to turn their climate goals into a reality and accelerate their path to net zero. Net Zero Strategy leverages our in-depth sustainability track record and deep industry knowledge. Our sustainability offerings contribute to our dual ambition: To become carbon neutral by 2025 and net zero by 2030, and to help clients save 10 million tons of CO2 by 2030. The Net Zero Strategy offering includes working with clients to define their sustainability purpose and climate vision, helping to build an organizational structure and governance that will allow clients to achieve their decarbonization ambitions.
Implementing the significant changes needed to reduce CO2 emissions 45% by 2030 and become net zero by 2050 is one of the most urgent transformation challenges facing organizations today. Using science-based targets, we have been working diligently with our clients to set the vision, trajectory, and roadmap to help them accelerate their net zero transition, from commitment to tangible sustainable achievements, building on a decade of expertise.