How ESG impacts financial services

ByHanover Team
Posting date: 02 March 2022

1 in 3 companies consider themselves very effective at managing ESG risk, and there are tough guidelines to adhere to.

I’ve had many conversations recently with both clients and candidates about how ESG is becoming dominant within the financial services industry. This translates directly to a need for risk management, even more so due to high expectations and impending regulations.

Financial institutions are seen as essential facilitators for the change needed to tackle important issues within the ESG sphere. Companies therefore need to ensure that everything is in place and operative before these new rules are enforced.

This emerging set of rules and regulatory standards will require firms to validate the provenance of their ESG claims with robust data and extensive analytic disclosures. Greenwashing is no longer enough (not that it ever was), and millennial and Gen Z candidates will hold firms accountable for their actions.

In this article, we focus on the risk and compliance aspects within the financial services industry, and why getting ahead with ESG risk management will bring real benefits to your business and your recruitment programme.

What are these new ESG regulations?

Over the last decade, the devastating effects of climate change have become increasingly apparent, there has been a widespread demand for better recognition of basic human rights and easy access to data, and employees have left companies that are underperforming in these areas.

In the midst of this chaos, there has been a rapid increase in ESG strategy and policy creation.

A problem with these measures is that they have all originated from different sources, some being governmental, others transnational and others commercial, making for an inadequate and inconsistent ESG ecosystem.

This leaves a lot of room for greenwashing, whereby the ultimate goal of channeling private investment into genuinely sustainable economic activities will never be achieved (if anything, it will be undermined). This exposes those in the industry to serious risks with compliance and talent acquisition. Investors will be ramping up the pressure on banks, and talent will be seeking out opportunities with compliant firms. Is this industry equipped for that?

EU policy drivers have therefore decided that clarity is needed, and the only way to overcome this is to devise a singular set of ESG rules. As of Q1 2020, the enforcement of these regulations is already underway, including The Pending Taxonomy Regulation, The Climate Benchmark Regulation and The Disclosure Regulation.

So, what exactly do they involve? Without taking a deep dive into the regulations themselves, we can take a look at the four defining objectives set out by policy makers:

1. Channel investment towards sustainable activities: Defining regulation that sets out and classifies both sustainable and unsuitable activity, allowing investors to easily identify acceptable opportunities.
2. Inhibiting ‘greenwashing’: Substandard ESG credentials will no longer be able to mislead investors (or attract top-level, ESG-conscious talent) with their green façade. A set of benchmark rules and stringent classification will help to overcome this.
3. Full-disclosure requirement: Disclosures will be required that demonstrate tangible provenance of a company’s ESG claims, while also setting out the relevant risk exposure.
4. Continued assessment: Requiring firms to assess such exposures to the products they manufacture or distribute, the services they provide and also the exposure of their own firm, through enhanced risk management rules and recalibrated prudential measures.

The European Commission has also released a helpful visual guide to the measures involved.

Meanwhile, the FCA has also been working to establish their own ESG strategy, working in collaboration with the Government, UK regulators and other relevant stakeholders.

What are the risks involved?

The environmental risk factors include climate change disasters, greenwashing and showing disregard to the net zero transition on both an internal and country-wide scale. Therefore, investments within industries that contribute to any of the above, such as the mining of fossil fuels, will naturally default as these regulations come into force or, in an insurance scenario, when natural disasters continue to create economic chaos. Industry leaders should instead look to invest in innovative organisations that are generating new tech to fight climate change.

Socially, you’ll need to demonstrate compliance with elements such as diversity and inclusion, the living wage and fair taxation. The societal implications of the AI revolution also need to be carefully considered.

From a governance standpoint, you risk significant financial damage from poor decision making or a lack of regard for the rules. Transparency, reporting, structure and oversight are essential.

The benefits of implementing ESG

ESG regulations are set to become enshrined within the next few years, giving you a brief window of time to get ahead of the curve, ensure complete ESG compliance and therefore attract high-performing talent that could otherwise go to a competitor.

For firms with existing ESG business, you’ll still need to re-address your approach to ensure close alignment with the new regime.

The many benefits of addressing this now include:

  • Making your organisation more attractive to emerging, highly skilled talent 
  • Retaining high-performers and talent who place great value on working for an organisation with ESG at its heart 
  • Being better positioned for a successful future 
  • Ensuring long term value creation 
  • You’ll be well-placed to adapt products and services around the global consumer base that is pushing for better environmental protection, observance of human rights and complete corporate transparency 
  • Equipping your organisation robustly for unexpected and unprecedented shocks in the future - studies revealed that ESG stocks did best during the COVID-19 crisis

Recruit top-level talent for the best ESG approach

The best way to bolster your ESG approach is to secure top-level talent who know their way around the regulations and can assist you in delivering and actioning a desirable strategy.

There is quite simply no time like the present to get ahead of the curve and avoid risks such as stranded assets, and be better placed to deal with unexpected or unforeseen occurrences.

If you’d like to talk through your ESG policies and what they could mean for your organisation, please get in touch with me and let’s schedule a call at a time convenient for you.

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