Sustainable finance is generally referred to as the process of considering Environmental, Social and Governance (ESG) factors when making investment decisions, leading to increased longer-term investments, sustainable economic initiatives, activities and practices.
ESG covers the many actions, processes, and projects that a firm may undertake to perform their duty as good citizens. This may include issues like diverse and inclusive workplaces, sustainable development, the efficient use of energy, recycling and following high ethical standards.
More than ever consumers, employees, and investors are making their decisions based on ESG principles, such as climate change and diversity & inclusion. Organisations across the globe are swiftly adopting ESG principles and have a greater need for transparency and standardisation to track, measure, and report on their ESG goals and initiatives. Investment firms also face increasing pressure from investors, regulators and stakeholders in general, to integrate ESG and sustainability factors into their investment process.
Why it Matters to Firms
Shareholder value is a key driver for firms. Institutional investors need to understand a firm’s long-term strategy and how risk appetite is incorporated into its business model and how it adapts its business practices to ESG considerations, so that they can better assess risks and make well informed investment decisions. For example, investors may want to avoid firms which have an explicit detrimental impact on the environment, or do not meet satisfactory labour standards and working conditions.
It’s becoming increasingly important to consumers that the firms they support, align with their own ethical commitments. At the organisation level, it is important to the people within the firm to understand and align with the meaning and initiatives of ESG sustainability, in order to support a strong brand and create awareness among key audience members; a brand without the organisation’s people behind it and the support of consumers is just “a brand” – an empty shell without substance.
ESG considerations have become increasingly important in recent years. Although ESG investing is taking centre stage, not all firms have a genuine interest in incorporating the relevant principles. Firms may claim “green” credentials in a superficial manner for the purpose of promoting their brand, without actually upholding them in their operational practices, a phenomenon referred to as “greenwashing”. Investors are therefore starting to demand clarity and transparency when it comes to such practices.
On a corporate level, ESG considerations may include a reputational risk element. Upholding high standards of ethics and integrity throughout the organisation, are vital in mitigating this risk, maintaining a strong reputation and sustaining credibility. These standards should be reflected in the firm’s corporate strategy, objectives and commitments as well as its corporate culture.
The Importance of Acting Now
The ESG movement has gained momentum in recent years, with significant concerns over climate change, global warming and greenhouse gas emissions leading to ambitious global objectives such as the Paris Agreement. Green goals and sustainable (ESG) finance are now in the forefront and investors are demanding more robust and efficient frameworks, more transparent and comparable data and reliable ESG credentials.
Equally important are the standards and principles which are based on a broader concept of sustainability with respect to societal values related to the environment, human rights, gender equality, and other related issues.
There is a fundamental shift occurring, in which investors are realising that incorporating sustainable factors into financial processes is not only essential for protecting the planet, but also beneficial and crucial to long-term returns.
Considerations for Firms
Among the most important factors that firms should consider are:
- Understanding which regions, sectors and types of firms are affected, as well as the key regulatory challenges and how to meet them
- Addressing the data challenges in gathering and standardising data, creating comparable datasets and properly reporting it to the correct regulatory authorities
- Keeping track of ESG regulatory developments and creating an action plan to develop, implement and maintain appropriate regulatory reporting procedures
The investment industry has a crucial role to play in the ESG arena, and these new legislative changes address organisational and regulatory requirements for asset managers and introduce sweeping new reporting, governance and data collection demands.
These data demands are significant in achieving this integration and the multiple complexities of these wide-ranging and multi-layered regulatory reforms will require fundamental changes in the way that firms define, source, manage, control, maintain and finally report, their data.
