FS organizations will be obliged to step up as investors prioritize corporate ESG principles

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Over the last few years, ESG standards have been influencing corporate decisions and gaining momentum through better operational performance and risk mitigation.

The unprecedented disruption unleashed by COVID-19 is among the numerous events sparking C-suite executives, corporate boards, and financial firms to pick a lane when it comes to environmental, social, and governance (ESG) standards. Recently, many of us have stepped back and considered our influence and dependence on the environment and society, and how organizations regard stakeholders – employees, customers, suppliers, investors, and communities. It’s about diversity and equity across all levels of business.

Less than a year ago, the World Economic Forum (WEF) published a whitepaper outlining universal ESG metrics to help companies measure stakeholder capitalism. Then, this past January, more than 60 top global business leaders committed to Stakeholder Capitalism Metrics focused on people, planet, prosperity, and governance. The metrics include 21 universal, comparable disclosures, considered critical for business, society, and the planet. All companies, regardless of industry or region, can leverage these metrics to benchmark their sustainability efforts, improve decision making, and enhance transparency and accountability.

Investors, stakeholders, and consumers are loud and clear about wanting corporations to prioritize sustainability and ethical impact; and tone-deaf responses may fuel stakeholder abandonment. Organizations and nations that ignore sustainability risk market skepticism and diminished investor interest and capital infusion. By contrast, transparency and ESG champions are attracting investment, including higher-quality and more long-term capital.

Over the last few years, ESG standards have been influencing corporate decisions and gaining momentum through better operational performance and risk mitigation. A joint study by the NYU Stern Center for Sustainable Business and Rockefeller Asset Management examined the relationship between ESG activities and financial performance and found that corporate sustainability initiatives drive better financial performance due to mediating factors such as improved risk management and more innovation.

High ESG-rated companies have lower capital costs, higher valuations, are less vulnerable to systemic risks, and are more profitable. Not surprisingly, in 2020 ESG investing accounted for one out of every four dollars under professional management in the United States and one out of every two dollars in Europe. Many firms now seek a carefully orchestrated strategic balance between financial, social, and environmental priorities to support long-term business success.

The growing role of financial institutions

Responsible banking and skillful ESG management can improve risk-adjusted returns, enhance reputation, spark commercial opportunities, mitigate portfolio risks, and improve market positions and value, according to the United Nations’ Principles for Responsible Banking. This behavior is all the more critical for commercial banks involved in lending and driving corporate clients’ business operations.

An ESG yardstick can help banks qualify commercial loan candidates and decide which client relationships to cultivate or dissolve. Financial institutions that run a significant asset management business may face complex ESG risks and opportunities.

A post-pandemic survey by Deutsche Bank revealed that more than half of private-banking clients now believe ESG investing can mitigate risks, while 74% said that COVID-19 made them realize the importance of risk management. The role of banks and environmental, social, and governance standards intersect during loan provision, financing of or investment in projects, and advice to issuers of securities.

  • Bank of America tripled its environmental financing goal to reach USD1 trillion by 2030 to boost its commitment to a sustainable future.
  • Goldman Sachsmerchant-banking division plans to form a sustainable investing group as part of its 10-year commitment to pump $750 billion in sustainable financing, investing, and advisory activities.
  • Citi’s five-year 2025 Sustainable Progress Strategy includes a USD250 billion environmental goal to finance and facilitate global climate solutions.

The pandemic made all things more visible

As the initial waves of COVID-19 impact wane, ESG is on the radar of investors, regulators, and banks. Awareness will surely continue given the significant risk concerns (such as climate change) that ESG has thrust into the spotlight – all potential threats for banks and the financial system broadly.

Many banks have begun to integrate sustainability into their core businesses by incorporating ESG considerations into risk management processes, product design, purpose statements, and long-term strategies. The pandemic illustrated the gravity of sustainability, such as the need for continuity planning and disaster preparedness.

Consumers and businesses are more mindful of sustainable investments

Not only did COVID-19 popularize savings and safe instruments, Capgemini’s Consumer Behavior survey indicates that investors increasingly prefer assets with a societal impact, such as green bonds. At the height of the pandemic, the percentage of consumers who said they were interested in investing in assets with a positive social impact within six to nine months grew from 31% (before the outbreak) to 39%, despite potential for lower returns.

Increasingly, ESG issues are taking center stage as institutional investors exert their influence and channel more funds to investments that deliver measurable impact along with improved long-term financial returns. A Bloomberg Intelligence Report predicts that global ESG assets will exceed USD53 trillion by 2025, accounting for ~a third of total projected assets under management − USD140.5 trillion.

The way forward: A cultural shift to organizational ESG vision

These days, commercial banks are compelled to assess borrowers based on ESG criteria to filter out those with practices that may not be sustainable. Strategic lenders are integrating resources across credit platforms to measure ESG factors.

Demand for ESG integration is accelerating, which means laggards may run out of time to to thoughtfully implement appropriate structure, leadership, and skills to embed organizational ESG principles.

The planet’s future depends on us. The question is, are financial institutions considering the ESG impact of their clients’ business models?

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