Is ESG & Sustainability the Next Big Thing in the Finance Industry

While the financial industry and sustainability do not go hand in hand, the scenario is about to change. 

The value of financial assets in the global capital markets is continuing to increase. The financing gap to reach the 2030 Agenda represents only 1% of the hundreds of trillions of dollars saved in the global financial system. However, the financial sector is not yet aligned in support of the global goals.  

The financial services sector has a stake in ESG, from the impact of climate change, fossil fuels, and alternative energy sources on the growing capital markets. These effects have had and are likely to have negative impacts on financial services globally. 

It is in the best welfare of the financial sector to address the underlying ESG risks from one perspective and work towards aligning their social forces to push for change. 

While some financial institutions have been advancing this trajectory, many are slowly addressing ESG primarily as a reactive effort to align with their external pressure. But with the appropriate strategy and the right processes, and technology capabilities, organizations can integrate ESG initiatives into their framework and use it to their advantage to create more business opportunities.  

Read more: Sustainable Aviation: How Sustainable Aviation Fuel Will Assist in Flying CO2-neutral 

Taking Customer's Conscience into Consideration  

Financial institutions are shifting their priorities from shareholder to stakeholder, mainly in the form of changes to governance models to accommodate socially responsible behaviors. And with the announcement of the Net-Zero Banking Alliance, financial institutions are adding the environmental and social aspects of ESG to demonstrate their commitment to sustainable growth. 

Today consumers are of the opinion that companies should be actively working towards creating ESG best practices and aligning their beliefs with their own. And as customers are following their conscience, they have an increasingly critical voice in how sustainable practices are being embraced globally.   

The rising pressure to embrace diversity, equality, and inclusion is being further strengthened by the prevalence of ESG ratings and social media. Customers' demands for financial institutions to behave in ways that align with socially responsible policies are becoming more visible than ever before. Many customers are changing loyalties and selecting to do business with organizations whose strategies address environmental and social responsibility.  

There has been rising equality and a lack of accountability to measure sustainable efforts. And there is an urgent need for firms to better understand the existing environmental, social, and governance factors that impact long-term risk-adjusted ROIs. Financial institutions need to take action and advance the alignment of the operational systems to be in more resilient, inclusive, and sustainable development. 

Integrating Sustainability Metrics in Investment Plans  

Most public institutions are updating their investment methodologies to incorporate sustainability metrics as a vital part of their return on investment (ROI) analysis. The transition from viewing sustainability as a source of risk management to a unique driver of returns is becoming transformative for many companies. 

Read more: Driving Sustainable Revenue with Product-led Growth 

Many organizations today have evolved from a purely risk-oriented approach by targeting environmental, social, and governance (ESG) concerns. They have started optimizing their operational frameworks to attract customers, investors, and talent. However, the next stage in this evolution is to drive sustainable transformation by making ROI a key focus.  

The increased adoption of ESG into investment cycles across financial institutions is leading to an increase in ESG expertise within investment teams. But the real potential for disruptive innovations can be encountered at the intersection of ESG data analysis and financial data. 

For many, taking the lead on ESG involves embedding ESG into the investment cycle along with due diligence, onboarding, and reporting is still a hard nut to crack. A few players in the finance industry are meaningfully stepping up their ESG policies by examining material issues through the lens of value creation and compliance checklists. They are identifying new opportunities that are contributing to generating healthy returns. 

Embracing ESG as a Driver of Returns  

Traditional investment methodologies overlooked the value of intangible benefits when considering investment returns. However, today organizations are embracing sustainability and integrating it as a driver of returns. They are updating their investment criteria and assessing the nontangible benefits of their investments. Organizations connecting to a broader corporate strategy witness new benefits and be perceived as a favorable option by investors and other stakeholders. 

Financial institutions are partially mitigating the challenges of a higher interest rate environment by allocating ESG-linked bonds that gain more favorable discount rates. A recent Gartner report predicted that more than $3 trillion of ESG-linked bonds are likely to be issued by the year 2026, which will account for approximately 30% of total market issuance. 

Many institutions have already experienced positive returns by placing emphasis on sustainability and through small-scale, green capital investments. It is further enabling the industry to facilitate longer-term and transformative sustainability investments to investors and businesses across different sectors. 

Read more: Sustainability in Tech: 3 Ways for Companies to Become More Sustainable 

Adjusting ESG Investment Methodologies 

To further align their sustainability goals financially, industry leaders are adjusting their investment methodologies across different areas, like: 

1. Assessing their geographic portfolios to explore new opportunities with stated ESG objectives. Gartner highlighted that almost 30% of multinational organizations are set to streamline their geographies and subsidiaries due to sustainability regulatory requirements by the year 2026. 

2. Ensuring that investments that demonstrate a clear benefit to the organization are considered equal. 

3. Aligning operational framework with strategic objectives by balancing long-term sustainability investments with additional aggressive short-term investments. 

4. Leveraging existing frameworks and accounting models to support the growth in organizations estimating the value of intangibles. 

Key Highlights 

• Investors and companies are increasingly weighing the current climate risk into their investment decision framework and finding answers to persist whether regulatory solutions offer a better sustainable path forward. 

• Scientific research indicates climate risk is likely to impact global growth soon. 

• Uncoordinated regulatory responses are further creating confusion and doubt in the financial markets. But 

• market-based solutions are also plagued by inconsistent standards and terminology. 

• With effective and standardized ESG disclosure, institutions need to foster sustainable growth. 

Read more: Sustainability Outlook: Is ESG an Investment Strategy or a Path to Creating a Sustainable World? 

Making ESG a Priority for Growth 

Implementing an ESG capability requires finding solutions to some vital queries. They are as follows: 

• What areas of ESG does a business want to address?  

• Are there clear of their short- and long-term objectives?  

• Do they have measurable key performance indicators that can be used to track their journey?  

• What constitutes "wins" and "losses" during the journey?  

• What lines of business or domains will be impacted? 

• How will they track their efforts?  

• How can the accumulated insights be used to shape future ESG policies?  

• If any future ESG regulations arise, will the existing data support the audit and compliance? 

• How will organizations track their investments in ESG along with ESG-based initiatives? 

• How will they manage the possible risks in ESG initiatives and other frameworks?  

• What skills and technologies will be required to manage ESG compliance? 

• How will they integrate ESG into overall business planning and governance? 

Integrating ESG practices into existing operations is a complex undertaking. However, for financial institutions to succeed, the frameworks should be backed by a variety of skills and technology. This involves introducing a new breed of risk management and strong data analytics capabilities along with automation to avoid creating new sources of complexity. The financial industry now needs to start identifying answers to these questions and employing technology that aligns with the ESG requirements. 

With a presence in New York, San Francisco, Austin, Seattle, Toronto, London, Zurich, Pune, Bengaluru, and Hyderabad, SG Analytics, a pioneer in Research and Analytics, offers tailor-made services to enterprises worldwide.        

A leader in ESG Services, SG Analytics offers bespoke sustainability consulting services and research support for informed decision-making. Contact us  today if you are in search of an efficient ESG integration and management solution provider to boost your sustainable performance.