ESG resilience for financial institutions

Focus in the global business and policy community has rapidly shifted to Environmental, Social and Governance (ESG) standards in recent years. There is an emerging consensus that undertaking an ESG shift is important not only for integrating emerging compliance regulations but also to gain a competitive advantage in the market. Given the central role of the financial sector in the overall economy, the ESG behaviour of banks and other financial organizations, in particular, is in the spotlight. The imperative is there for these institutions to adapt early and adapt fast. This Report lays several key insights and recommendations for companies and regulators looking to skillfully navigate the ESG landscape, with a focus on financial institutions.

Firstly, it finds the value of ESG integration to be rapidly increasing for financial institutions. The size of the ESG financing and investment market is expected to exceed $50 trillion USD by 2025. This offers an opportunity for financial institutions to develop holistic strategies given the synergistic nature of E, S & G initiatives. For financial institutions, there is a commercial incentive to do so, higher ESG scores transform into increased and more stable cash flows, and a better ability to manage both company-specific and systematic risks. In addition to this, the use of financial instruments such as sustainable and sustainability-linked bonds can offer institutions the chance to raise both higher volumes of capital and at a price premium from expectant financial markets.

The Report also assesses potential ESG positioning options in the financial sector. It identified three core positions where financial institutions stand on the ESG adaption curve: “Compliant”, “Contender” and “Leader”, each with an increasing level of proactive policies towards a fully integrated ESG approach. The Report recommends moving from a compliant to a leading role to seize commercial and funding opportunities and avoid playing regulatory catch-up. Reaching the “Leader” position is a journey for each institution, and they should consider their current state, required capabilities, and overall ESG strategy needed to get there.

The report outlines strategies for financial institutions and regulators to develop a comprehensive ESG strategy. It details key questions which should inform their process in addition to a phased approach to strategy development. Like any other strategic choice, ESG is about market positioning, defining the strategy, implementing it, and monitoring it. One thing is clear though: not acting now, means almost certainly arriving late to the “ESG party”.