ESG Focus: Why Financial Institutions Hold the Key to ESG Success

FNArena’s dedicated ESG Focus news section zooms in on Environmental, Social & Governance (ESG) issues that increasingly guide the preferences and decisions of investors around the world. For more news, past and future updates:

Why financial institutions hold the keys to ESG success

By Matthew Talbot, Head of Financial Services at APAC and Japan, ServiceNow

Banks and insurers have great power in the development of sustainable change for all sectors. Here’s how they can do it.

Most transactions that take place today can be completed in seconds. But what happens next often causes long -term damage to the environment.

In a detailed evaluation of funded emissions last year, CDP, a non-profit climate organization, found that greenhouse gas emissions associated with investing, lending and underwriting loans in carbon-heavy industries were, on average, more than 700 times higher than the direct emissions of the financial institutions themselves.

Funds provided by such as banks and insurers for such industries contribute to emissions that often exceed their own, such as the flight of an executive to meetings or the carbon footprint generated by their office building. This impressive difference is often attributed to a lack of transparency. For example, the report found that many companies did not report their portfolio emissions, obscuring the actual impact of their financial activities.

Funded emissions reached 1.04 gigatons of CO2 by 2020, or approximately 3 percent of total global emissions. That’s nearly annual emissions of nearly 216 million vehicles on the road. But the real figure is probably higher.

These surprising numbers make it clear that financial services and organizations play an important role in combating climate change. As important, they can make a big difference in other areas beyond the environment.

From gender equality to corporate transparency, companies are now expected to place environmental, social, and governance (ESG) issues at the core of their business goals. As the main source of funding for many sectors, financial institutions have great power in implementing the desired changes.

While their own impacts on ESG need to be addressed, financial services organizations also have the unique opportunity to finance ESG projects around the world on a scale.

Staying trendy and following regulations

ESG is the main buzzword of today’s investment world, where people prioritize values ​​over income when deciding where to put their money. Younger investors, in particular, are stimulating the growth of ESG investment.

In fact, ESG funds grew by US $ 596.2 billion in 2021, with Bloomberg Intelligence estimating that such assets are set to reach a whopping US $ 41 trillion by the end of this year. A CNBC article the millennials who have been driving this trend of responsible investing over the past decade.

“We are seeing increasing trends in the investment space where consumers are looking at investment funds that are putting ESG considerations into considerations,” said Liu Chun-Yen, Chief Investment Officer of AIA Singapore. “If we haven’t been on this journey yet, we’re going to lose a major customer trend.”

But ESG goals aren’t just good to have. Breeding, they are also a must have. Over the past decade, ESG -focused regulations have increased – there will be more than 200 new global regulations in 2020, up from 128 in 2019.

For example, the Monetary Authority of Singapore-the country’s financial regulator-has set up the Green Finance Industry Taskforce which aims to accelerate green finance across the country, such as by improving disclosures to financial institutions.

In 2021, it launched a guide outlining specific climate -related disclosure practices. It aims to help improve the quality and consistency of climate disclosures across the sector, paving the way for better standardization when it comes to ESG issues.

Key challenges of ESG

But adopting ESG programs can be difficult for companies. One of the biggest difficulties is trying to integrate ESG initiatives into their core businesses, says National Australia Bank (NAB) Non-Executive Director Ann Sherry AO.

“In a lot of organizations, I still see it (ESG) sitting as a key central role advising businesses, but sitting outside the decision -making process,” he said. “ESG needs to be embedded within the business and strategy.”

The second challenge is a classic case of less haste, less speed, when companies move too fast to achieve their ESG targets.

“Companies are trying to jump 12 steps ahead in terms of what they want to achieve and deliver on their ESG targets,” said EY Oceania’s Climate Change and Sustainability Partner Emma Herd. “But they stumble along the way because they don’t take the time to understand the issues, risks and implementation strategies.”

Moving too fast also carries the risk of greenwashing, which products labeled green or sustainable really aren’t.

And while many regulations come out in a bid to implement ESG, it presents a third challenge: a lack of consistency in measuring ESG performance. With more than 200 global frameworks and standards, disclosures are often inconsistent and incomparable.

This has raised concerns about organizations reporting different things, Sherry said. “We don’t want to be accused of reporting things that are too promising or make us beautiful, when we need to be consistent across as many sectors as possible,” he said.

“That’s the standout-only challenge-to get consistent measurements of everyone’s responsibility.”

Strengthening collaboration and building capabilities

Beyond establishing a universal set of global standards, there are other steps financial institutions can take to adopt ESG initiatives and facilitate sustainable agendas for other sectors.

First, the leading brass needs to act. “The tone from above is important,” Liu said. “The board needs to start developing strategies. The group’s executive committee needs to embrace and embed ESG in these strategies … how to start and build momentum.”

Having ESG embedded at all levels of organizations is how AIA successfully launched the recent “1 billion by 2030” initiative, which aims to improve the physical, mental and financial health of one billion customers by the end of this decade.

Although the board of directors has conceptualized key ESG strategies, having individual ESG management committees in its local business units allows AIA to implement this massive mission on the ground in Different countries.

Second, change must come from within. “We need our people in all departments, from financial services to business technology, to understand this issue (ESG targets),” Herd said.

To get a buy-in, EY launched a Masters in Sustainability program that serves as an incentive for staff to upskill and become a force multiplier. “The more people we can inform, upskill and train on sustainability, the more impact we think we can have,” Herd added.

From setting targets to tracking performance, digital platforms can also help stimulate this change by embedding ESG activities within organizations.

Finally, there needs to be collaboration across the value chain. “The best way to deal with ESG issues is to work with our customers and suppliers,” Herd said. “Don’t try to do everything yourself.”

For example, NAB supports 100 of its largest greenhouse gas emitting customers in developing or improving their low-carbon transition plans by 2023. “It’s about finding places where you think you can make biggest difference, and focus on those areas, ”Sherry said.

Although promoting ESG goals takes time and requires many challenges, taking the first step in the journey to this change is essential. “Idle is currently the biggest risk in the current environment,” Sherry said. “Most of our customers want to switch (to ESG), and they need help to do so.”

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