ESG: Don’t be late to the party

The focus on ESG—Environmental, Social, and Governance—standards have rapidly increased in recent years, driven both by compliance requirements and a growing awareness that it can provide a competitive advantage.

The “ESG race” is spreading fast and is involving all markets globally due to evolving regulations and financial markets expectations. Organizations that can integrate ESG into their corporate DNA will increasingly enjoy a competitive advantage and a more robust economic performance overall. Those that are not willing or able to do so may expect to face an increasingly hostile international business and investment environment.

Three main learnings from Whiteshield’s ESG research and project experience, particularly in financial institutions.

ESG is directly linked to financial performance

  • Companies that perform well in ESG also perform well financially, driven by higher cash flow, better risk management and, therefore, lower cost of risk overall.
  • Better ratings translate into lower cost of capital (up to 100 bp “premium” for ESG leaders) and higher market valuations.

ESG performance matters, but so does perception

  • How do we assess the journey from performance to perception? At Whiteshield, we have developed the Whiteshield Resilience Index to map ESG performance and perception at the financial institution level and the jurisdiction level. The index has provided several insights.
  • Geographies and jurisdictions that have moved faster on regulating and stimulating ESG are the best in performance, but this success comes with its challenges. Namely, they could face a perception problem in the context of raising expectations. In ESG-mature markets, the UK, banks perform well, generally driven by their ESG governance. However, ESG perception is penalized for smaller performance gaps.
  • Geographies/ jurisdictions that catch up in performance are often quickly recognized in terms of perception.
  • More ESG-mature markets take performance for granted: improving fast from a lagging position is better.

ESG is a huge opportunity

  • Whether you are a financial institution or a regulator, you may want to define your target performance. In the following two-to-three-year timeframe, you can enjoy first mover advantage, create opportunities and explore ESG segments.
  • Financial institutions can fully reap the commercial and business opportunities of a soon-50 Tn USD market.
  • There are risks associated with doing nothing or the minimum compliance: to be crowded out by competitors. Compliance is not enough. If you want to become a leader, you need to start the ESG journey now.

The ESG winners will be the ones who act the fastest: what is leadership today will quickly become standard! Regulators will continue defining more frameworks and regulations to ensure a smooth transition into the ESG ecosystem; companies will continue developing more ESG-based business opportunities; and communities can and will expect more environmentally and socially friendly products and services, healthier impacts of business, fairer treatment of stakeholders, and ultimately a more sustainable future for society.

Author

Antonio SOMMA

Partner & Director

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