Introduction
Introduction
Long gone are the days where the focus of for-profit entities was exclusively on generating shareholder wealth1 . Beginning in 1970s, the focus gradually changed to have a broader view of for-profit institutional performance to include how these entities were creating value for their employees and the immediate communities where they operated. This was later supplemented by a focus on the impact of institutional practices on the environment. The changes were instigated by several catastrophic events that directed institutional outlook broadly to include several stakeholder groups who are or can affect institutional performance2 ; in addition to modifying governance mechanisms to incorporate and manage ESG practices.
The Key Summary
Balance creation by financial services firms across all three segments in ESG and boosting the transition to greener economy as whole:
Financial services sector is focusing on creating a balance across all three segments in ESG for overall growth: Since all three segments in ESG – Environmental, Social and Governance – are highly interrelated, the financial services sector is aiming to balance their focus on all three segments, to gain brand reputation.
Crucial role played by the financial services sector in funding the transition to greener economy as a whole: Financial services sector plays a very critical role in funding the transition to net zero and greener economy for all other sectors across the globe, and guiding capital flow to greener sources.
Financial services firms increasingly focusing on investing in ESG across their business operations as well as investment strategy:
Financial services sector being more aware of ESG profile across their business operations and their portfolio, investments and underwriting positions: Increasing investor and consumer sentiment shift towards a more responsible society, a sustainable planet, and improved governance is driving the financial services sector to be more aware of the ESG profile of their operations as well as their portfolio, investments and underwriting positions and integrate ESG considerations into their reporting and risk management framework.
Overall, 45% of the total respondents in the financial services sector indicated that they are well progressed in their ESG journey.
Financial services firms increasingly focusing on investing in ESG across their business operations as well as investment strategy:
Regulatory pressures across the globe have pushed financial services firms to increase the adoption and advancement in their ESG journey.
57% of financial services institutions are engaging in ESG activities for both their own strategy decisions as well as their investment activities.
Strong ESG performance results in lower systemic risk exposure for the firm, reducing the cost of capital and results in a valuation premium.
Companies with high ESG ratings tend to withstand crisis better than their competitors.
Challenges faced by financial services institutions in adopting ESG practices:
Lack of transparent and consistent data to measure performance on ESG metrics from investments undermines the credibility of ESG data markets.
Integrating ESG-related activities into financial, credit, investment or risk considerations along with lack of ESG talent and experience is noted as the major challenges, faced by 34% of the total respondents
Regulatory challenges, including no defined rules to navigate ESG frameworks for reporting data poses as one of the biggest challenges for the financial services sector.
Reviewing data for quality and consistency, as well as reissuing revised data requests to improve data quality are being considered as significant challenges faced by more than 60% of total respondent.
Firms are increasingly facing the risk of serious financial and reputational damage, primarily from greenwashing allegations, if they do not report or disclose their true ESG strategy and adoption
Outsourcing as a good option for finanical services firms to expediate their ESG adoption journey:
88% of the organisations deploy the services of external consultants and outsourcing providers for their ESG activities
Conclusion
Over the past few years, ESG reporting has increasingly become a focal point of regulatory compliance and strategic business considerations within the financial services sector. The pandemic and associated implications on the global economy, combined with climate change and social uncertainty with tensions between various countries, acted as a catalyst to increase the focus of the world on environmental, social and governance issues.
The financial services sector is increasingly integrating environmental and social responsibility as well as reducing governance risks in how they operate and invest. Since all three segments in ESG – Environmental, Social and Governance – are highly interrelated, the financial services sector is aiming to balance their focus on all three segments, to gain market share, improve investor as well as employee confidence, raise more capital as well as enhance brand image.
About the Authors
Dr Biswaraj Ghosh is a key member of Acuity’s Corporate and Consulting vertical and oversees project execution and delivery for clients across multiple sectors covering Climate Change, and a range of ESG services. He possesses several functional expertise including solving sustainability-related issues, developing decarbonization strategies, stakeholder engagement, ESG risk assessment, materiality assessment, climate management, sustainability management, target setting, KPI design, etc. through qualitative & quantitative research. He is a Copyright holder (UK and India) for the indigenously developed Sustainability Management Model as part of his PhD thesis. He is also a published author, an international ESG talk show expert..Show More
Diksha has over 7 years of experience on a variety of strategy business consulting and advisory services for corporate clients. Her work predominantly focuses on corporate strategy analysis, industry analysis, market assessment, target screening, competitive benchmarking, pitchbooks, company analysis, due diligence studies, amongst others. She has led and handled multiple teams, managing day to day client engagement, requests as well as involved in strategic planning, delivery and presentation of client deliverables including project scoping, planning and execution for smooth delivery of projects.
Shipra has over 5 years of experience in strategy research and consulting, having extensive experience in secondary research assignments including industry research, market entry strategy, deep dive company analysis, competitive intelligence, opportunity analysis, lead generation, newsletters, and executive profiles. She has led and handled client across different industries including retail, financial services, and real estate among others, involved in delivery and presentation of client deliverable including project scoping, planning and execution
Akriti has over 6 years of experience in industry research & consulting and has worked on various research projects including industry research, company profiles and competitive intelligence. She is involved in managing projects, including project scoping, identification of research approach methodology, developing strategy frameworks and providing the solutions for client’s business needs. She has worked on multiple ad-hoc consulting projects for global clients specializing in market estimation, growth outlook analysis, risk identification, investment flow analysis and opportunity assessment.
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