Sustaining the bottom line: The Financial Sector’s alignment with ESG goals will be a key determinant of survival

The Financial Sector is at a unique position to significantly contribute to the ambitious COP26 goals. Industries require capital from banks which in turn contour the investment landscape, shape the trends, and ensure that the solutions required are funded and scaled appropriately.

Involvement no longer a choice but a necessity for survival

The sheer impact and necessity are enough to justify action from the finance sector, but ESG reporting is also vital for the success of the firm. The biggest push comes from the investors and asset managers themselves who wish to put their money where their values are and see sustainable long-term growth in this sector. In April 2021, S&P Global Market Intelligence revealed that out of the 26 ESG exchange-traded funds with more than $250 million in assets under management that they analysed, 19 performed better than S&P500 along with lesser volatility ¹. ESG aware investors demand more transparency from companies to guide their decisions, 85% of 440 impact investors assessed by the Global Impact Investing Network (GIIN) in 2021 said their impact investment strategies focus on SDG-alignment.² A survey by market intelligence company Acuiti found that 83% of asset management firms consider a bank’s ESG credentials when considering which prime brokers to use. ³

There is also pressure from activist shareholder campaigns which has almost doubled in the UK in 2021 (42 companies from 24 in 2020)⁴ and policies are gearing up to get more stringent pushing companies to be accountable and transparent.

In this high-powered environment, banks have a fiduciary duty towards stakeholders to consider foreseeable risk that could have negative impact on assets. Ignoring ESG factors puts the company at risk for financial, social and governance related situations which will damage the financials, productivity, and reputation of the organisation.

The way forward

The financial sector is at the crux of change, and we already see multiple initiatives underway.

One of the biggest opportunities for the financial sector to embed these goals into their operations is green investing. Global ESG fund assets have increased from just $1 trillion in 2019 to $3 trillion in 2022. The EU introduced the Sustainable Finance Disclosure Regulation (SFDR) in 2021 which aim to make the sustainability profile of funds more comparable and better understood by end-investors. Over 110 global FIs have already committed to setting Science Based Targets (SBTs). ⁵

Banks have begun the journey of transitioning their portfolios to align with these goals. NatWest plans to phase out of coal for UK and non-UK customers who have UK coal production, coal fired generation and coal related infrastructure by 1 October 2024, with a full global phase out by 1 January 2030.⁶ Firms are also taking steps to reduce their operational carbon footprints – HSBC sources 37% of energy from renewable sources, reduced paper consumption by 73% and water consumption by 56%.⁷ On the Social front, banks can reduce inequalities and uplift communities through financial and digital literacy. JP Morgan hired 25 Senior Business Consultants to offer free one-on-one mentorship, and technical assistance to Black, Hispanic and Latino business owners in 14 U.S. cities.⁸ Firms can also collaborate with the government, participate in welfare schemes and regulatory discussions. HSBC jointly structured the UK government’s first green bond, helping it raise a £10 billion to be used for projects such as offshore wind farms and to create green jobs.⁹

The addition of an ESG section to company websites does paint a greener picture but the industry is still heavily reliant on voluntary reporting mechanisms and the standardisation of metrics is still underway. This leaves gaps for loopholes and lofty claims with little to no backing. London-based nonprofit InfluenceMap conducted a review that concluded that 55% of funds marketed as low carbon, fossil-fuel free, and green energy exaggerated their environmental claims, and more than 70% of funds promising ESG goals fell short of their targets.¹⁰

While activist groups and the media continue to expose and question companies on their initiatives the Financial Conduct Authority just recently (October 2022) proposed new rules to tackle greenwashing which include investment product sustainability labels and restrictions on how terms like ‘ESG’, ‘green’ or ‘sustainable’ can be used. ¹¹

This is a much-awaited step in the consolidation and standardisation of the ESG sector. It helps investors identify and build trust in sustainable products while ensuring more accountability from organisations that use these terms. And the trend towards more “international coherence” amongst regimes will only grow as the ESG sector becomes more regulated. It is therefore in the best interest of the financial companies to ensure compliance with ESG frameworks and transparency with stakeholders. ESG is already proving to be a differentiator in the competitive landscape and the future of the organisation will heavily depend on strategic decisions taken today to stay ahead of the curve.

References

1. Clark, R. and Whieldon, E. (2021) ESG funds beat out S&P 500 in 1st year of covid-19; how 1 fund shot to the top, S&P Global. Available at: https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/esg-funds-beat-out-s-p-500-in-1st-year-of-covid-19-how-1-fund-shot-to-the-top-63224550 (Accessed: October 31, 2022).
2. Hawker E. (2022) Making an impact on SDGs, ESG Investor. Available at: https://www.esginvestor.net/making-an-impact-on-sdgs/ (Accessed: October 31, 2022).
3. Acuiti (2020) Special report ESG: The opportunity for the sell-side – Acuiti, ESG: The opportunity for the sell-side. Acuiti. Available at: https://www.acuiti.io/wp-content/uploads/2020/12/ESG-the-opportunity-for-the-sell-side.pdf (Accessed: October 31, 2022).
4. Roach, G. (2021) Activism is back in the UK as campaigns double, IR Magazine. Available at: https://www.irmagazine.com/activism/activism-back-uk-campaigns-double (Accessed: October 31, 2022).
5. SBTi (2022) Financial sector science based targets, Science Based Targets. Available at: https://sciencebasedtargets.org/resources/files/Financial-Sector-Science-Based-Targets-Guidance.pdf (Accessed: October 31, 2022).
6. NatWest (2021) Our approach to climate change, NatWest Group. Available at: https://www.natwestgroup.com/sustainability/environment-and-climate/our-approach-to-climate-change.html#:~:text=Helping%20to%20end%20the%20most,out%20by%201%20January%202030. (Accessed: October 31, 2022).
7. HSBC (2022) Net zero in our operations, HSBC. Available at: https://www.hsbc.com/who-we-are/our-climate-strategy/net-zero-in-our-operations (Accessed: October 31, 2022).
8. JP Morgan (2021) 2021 Environmental, Social and Governance Report Available at: https://www.jpmorgan.com/content/dam/jpmc/jpmorgan-chase-and-co/documents/jpmc-esg-report-2021.pdf (Accessed: October 31, 2022).
9. HSBC helps UK raise funds to fight climate change. (2021, February 20). HSBC https://www.hsbc.com/news-and-media/hsbc-news/hsbc-helps-uk-raise-funds-to-fight-climate-change
10. InfluenceMap (2021) Climate funds: Are they Paris aligned?, InfluenceMap. Available at: https://influencemap.org/report/Climate-Funds-Are-They-Paris-Aligned-3eb83347267949847084306dae01c7b0 (Accessed: October 31, 2022).
11. FCA (2022) FCA consultation paper on Sustainable Disclosure Requirements and investment labels (CP22/20), Financial Conduct Authority. Available at: https://www.fca.org.uk/publication/consultation/cp22-20.pdf (Accessed: October 31, 2022).