As the world of Financial Services grows more complex by the year, especially when you factor in the changes brought by the global pandemic. ESG has certainly become a key topic for boards and their senior managers to discuss and debate as they refine their corporate position on the topic. But what does it stand for? What does it mean? Why should firms (and consumers) be sitting up and taking notice?
Some industry commentators would say that those who are not “in tune” with ESG, and think this is a new initiative, might need to take stock of where they have been for the last few years.
The markets are changing, and with that comes more demanding consumers. The world itself is evolving and we only have to look at the effects of climate change and wildfires, the impact of the Black Lives Matter movement, and the heightened focus surrounding Diversity & Inclusion to know that there are significant changes that need to be made to slow down and address the negative impact certain practices have on our world. For any of us that are not familiar with what ESG is and what it means for firms and investors, it’s worth time to consider what ESG’s key central factors are.
I can’t personally purport to be an expert on the topic, more an interested observer, a consumer, employee, investor and one who works for a firm that supplies RegTech to some of the largest financial institutions in the world. Therefore, I feel that it’s important for myself and my colleagues to understand what ESG means to the businesses we work with and support. In its simplest form, maybe think of ESG as a subset of non-financial performance indicators which are evidenced as the following:
Environmental – How a company treats the environment and natural resources, and what role it plays be it positive or negative
• Waste and pollution
• Greenhouse gas emission
• Climate change
Social – How a company treats people, which concentrates on positive or negative indicators around
• Employee relations and diversity
• Working conditions
• Health and safety
Governance – How appropriate the company’s approach is to governance, focussing on
• Board diversity and structure
• Corruption and bribery
• How a company is managed
In a world where diversity and inclusion matter, where employees are likely to choose employers because of their positive culture, and their commitments to sustainability, it’s an area that we would all do well to keep a watchful eye on. ESG is much more than just a score or rating to be attained, it is will also determine who can and will do business with you in the future.
I was interested to note that recently the FCA was forced to issue guidance via a ‘Dear AFM Chair’ letter to the investment industry. They pointed out to organisations that whilst investment funds that have an ESG based investment strategy have the potential to contribute meaningfully to addressing climate change and other sustainability goals. It had identified through work in the sector that assertions made about sustainability and ESG credentials were sometimes wide of the mark. As a result, they have issued a set of guiding principles to help firms in their work in this area.
Authorised ESG and sustainable investment funds: improving quality and clarity (fca.org.uk)
As the FCA and other regulators around the world ramp up the focus on ESG requirements, such as reporting for regulated firms, no doubt the debate and whether firms are presenting the right ESG credentials to consumers will continue. In the meantime, myself and the Worksmart team will continue to watch this area with interest. Will we as third-party suppliers find that potential clients will be challenging our approach as a corporate to ESG in the future? Who knows at this stage, only time will tell!
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