ESG: Financial Services Can Lead The Charge In Sustainable Growth

Climate change is dominating business discourse more than ever before. With an alarming rise of climate change-related crises and unsustainable growth, we are witnessing a paradigm shift and increased appreciation of the need for sustainable existence. This has resulted in new expectations of organizations, which are ultimately coalescing in the form of Environmental, Social and Governance (ESG) guidelines globally.  

The conditions today present a great opportunity for businesses, especially in the Financial Services sector, to lead the global transition to a responsible economy powered by sustainable growth. Going back in time, the 2008 sub-prime crisis led to an overhaul of the global economic system. But unlike in 2008, the current conditions are ripe for FS companies to collectively prioritize impact investing and sustainable financing.  

ESG – setting the industry agenda  

ESG regulations have come a long way since their first mention in the 2006 UN’s Principles for Responsible Investment (PRI) report. ESG dictates an investment philosophy that considers not only return on investment but also whether the company meets social responsibility standards when making investment decisions. The Principles of Responsible Investing and other such frameworks are laying the foundation for a complex normative landscape.  

This directly impacts financial market participants as they are now required not only by law but also by expectations of the “Responsible Investor” to integrate ESG, sustainability and climate change considerations into their credit and investment decisions. Indeed, the time is right to strengthen compliance to the normative and regulatory landscape around disclosures and understanding impacts of transition risks. 

In India, SEBI, the regulatory body for securities and commodity market, has introduced BRSR (or Business Responsibility & Sustainability Reporting) for the top 1000 listed companies to disclose their ESG parameters. BRSR is not a mere representation of ESG data, but an approach to drive an organization’s ESG commitment and demonstrate it transparently to stakeholders.  

The business response to ESG 

With each passing day, more institutional investors are making it clear they expect the companies they do business with to commit strongly to ESG norms and sustainable growth. American investment corporation BlackRock Inc. decided almost two years back to make ESG a bedrock of its investment decisions. HSBC pledged to commit $100bn to sustainable financing and investments by 2025.  

BNP Paribas uses four financial models to combine economic performance with a positive social and environmental impact: socially responsible investing, which integrates sustainability into management; green finance, which favours ecological bonds; social finance, which channels investment into funds that benefit communities; and social business, which reinvests profits into social projects.  

Today, over 90% of banks have identified sustainability as a strategic priority and are establishing the systems and policies to set targets for action. A clear focus on climate and financial inclusion is seen through mobilization of US$2.3 trillion of sustainable finance as reported by 87 global banks, per the Responsible Banking: Building Foundations report for 2021.  

Get, set, but nowhere to go? 

The ESG landscape is evolving in several ways due to the influence of different voices and opinions. A diverse ecosystem of entities like public regulators, governments, supranational institutions, financial institutions, academics, asset owners, asset managers and corporations, each with their unique points of view, has increased this complexity. Organizations too have developed siloed and distorted business models along their respective ESG journeys. 

As in the case of financial regulatory evolution, emergence of data science, advanced data engineering, and industrialization of AI / ML is playing a key role in shaping the ESG landscape. From simulating climate risk scenarios to ESG integrated statistical modelling of credit screening, data and AI technologies hold the potential to be a game changer. 

The ESG ecosystem consists of a diverse set of players – external agencies for ESG data and ratings, platform and Reg-Tech solution providers, data and AI technology providers, and even the prominent hyperscalers. With such a diverse landscape, the resulting confusion is significant. ESG regulations across countries, their different interpretations, and unique approaches to cope with this rapidly evolving ecosystem have added to the complexity. While organizations may have the intent and the budget to fulfil their ESG agenda, they lack clear direction.  

Charting an effective road map  

What organizations need today is an end-to-end transformative approach to counter the ambiguity. They need an approach that assesses and repurposes their existing investments, and which considers the most optimal and holistic technology and data providers’ longtail to promote the ESG agenda. They should build an approach that prioritizes long-term integration and stability over short-term misdirected initiatives.  

Going forward, the push for businesses to address ESG issues and opportunities will continue to grow – driven by investors, shareholders, governments, suppliers, and customers. There is recognition of the opportunities that ESG brings to the table. Companies should start with new policies that are workable. This will provoke a relook at new and alternate ways of approaching the business, which will eventually benefit and create value for organizations … and the world at large.

The author is Vice President, Head of Enterprise Data & Analytics, Capgemini Invent