What does the financial services sector look like in a world in which environmental, social and governance considerations assume as much as importance as financial ones?
This was the overarching topic for a recent forum hosted by Headspring. The groundwork for the day’s engagement was set by a panel of experts that included
Alan Livsey, Lex Editor at the Financial Times
Joe DiVanna, global strategic management consultant
Silvia Pavoni, Economics Editor, The Banker
James Stacey, Partner, Head of Financial Services, ERM London
The conversation, chaired by Financial Times’ Michael Skapinker and incorporating creative workgroup discussions with the room of FS leaders, generated the following key takeaways:
This is not a fad.
Though social and governance issues have received corporate attention in the past, our panel unanimously agreed that there is something different about today’s ESG landscape. This is not a fad. Market and business shifts precipitated by ESG issues are here to stay. Environmental concerns are leading the change agenda and the effects are already evident in declining valuations of sectors like coal, oil, gas and even aviation. Increasingly, ESG is determining major investment decisions.
As Alan Livsey says, “The flows are there. The marketers are on it. It is happening and I don’t think it’s going to go away.”
Financial services regulators are also moving to establish more concrete accountability in ESG domains, particularly environmental, with climate change increasingly understood to present systemic financial risk to the global financial system.
Understand the problem. And the opportunity.
Many leaders in the financial services sector are unsure how to approach ESG successfully. “Everyone is all over ESG,” says Silvia Pavoni, “But really we don’t know yet how to do it.” Joe DiVanna agrees, “The senior team is struggling with defining what ESG means to their organisation, and then trying to internalise that.”
Though pressure to change is coming from many directions, including internal, it is the business case for ESG that is taking precedence. According to James Stacey, “If you look at why boards and excos are shifting right now, it’s really about return on investment or probability of default if you’re in the banking industry.”
Regulatory requirements will make ESG a very real concern for financial service players as it will be tied to their licence to operate. But to gain a competitive advantage companies will need to take a more integrative approach to ESG or sustainable finance, embedding it throughout the business.
ESG is absolutely relevant to the hard returns that businesses face and the strategic direction organisations take. Environmental efficiency is being used to motivate cost-cutting, but there are also many new opportunities for growth. The companies that capitalise on these will also attract the best talent.
Recruit the best.
As competition for premium talent increases, financial services companies are required more and more to explain their position on ESG issues. Younger generations are not only looking at their personal potential in an organisation, they are asking, for example, what the bank’s role is in society.
Joe DiVanna: “We have to be able to demonstrate to them exactly how the bank’s trying to link the ESG agenda to their balance sheet, income statements. Once you link it to the revenue side of the ledger, that’s when you start to attract young people, because they see growth, they see opportunity.”
The best talent need to be convinced that the company stands for something meaningful and measurable. Sectors like banking have had an especially steep hill to climb since the financial crisis. “We need to be setting standards here,” says Alan Livsey, “Otherwise we’re going to find it very difficult to recruit.”
Set high standards.
A lack of agreed definitions, standards and benchmarks means businesses have the added challenge of measuring investment value and security in these areas.
Concludes James Stacey, “That really puts the onus on the corporate entity. Do you want to live with the benchmark that you’ve been given which, when you’ve analysed it in detail, know not to be quite right, or do you want to improve the quality of your disclosure such that you can fill the gaps and help the investors understand that your strategy is a good strategy?”
As with compliance, companies will need to move beyond greenwashing to take a broader and more accountable view of responsible investment.
Take a balanced approach.
ESG issues are growing in profile and status, with businesses needing to satisfy multiple stakeholders, including regulators, customers, employees (and potential employees), suppliers and shareholders. However, policy and decision makers need to maintain a balanced approach to tackling these challenges.
In approaching environmental change, for example, transition is very important. Taking this perspective changes the value of fuels like gas which are seen negatively in environmental terms but positively in economic terms because they have an important transitional role to play.
There will always be trade-offs in what is essentially an evolutionary process. Leaders need to be prepared for the ambiguity and paradoxes involved in meeting diverse requirements and expectations while delivering sustainable businesses.
“So those trade-offs are real. They’ve got to be dealt with, but the consequences of not dealing with them are far more severe than those trade-offs present,” says James Stacey.
These changes will require new skills.
Our panel see a deficiency of the skills needed to work with ESG issues at all levels in the organisation.
At a board level, the hard financial motivators to implement an ESG agenda need to be understood more clearly. At an exco level, organisations need to establish a house view on these matters that supersedes individual perspectives. Management needs to be moved away from seeing ESG purely as a PR issue towards a more systemic view. Finally, all individuals within the organisation need to be engaged and educated on the implications of ESG for their roles.
Underlying these developments is a need for clarity on what ESG means for the business, and then the ability to communicate that successfully internally and externally. Panelists agreed that this was far more than a PR message, it was a fundamental business proposition.