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ESG Focus: Why Financial Institutions Hold The Keys To ESG Success

ESG Focus | Jun 01 2022

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future:

Why financial institutions hold the keys to ESG success

By Matthew Talbot, Head of Financial Services in APAC & Japan, ServiceNow

Banks and insurers wield much power in fostering sustainable change for all sectors. Here’s how they can do it.

Most transactions that take place today can be completed in a matter of seconds. But what comes next often wreaks long-term damage on the environment.

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

The funds that the likes of banks and insurers provide for such industries contribute to emissions that often outstrip their own, such as flying an executive to meetings or the carbon footprint generated by their office buildings. This astonishing difference can often be attributed to a lack of transparency. For instance, the report found that many companies had underreported their portfolio emissions, masking the actual impact of their financial activities.

Financed emissions amounted to 1.04 gigatons of CO2 in 2020, or about 3 per cent of the total global emissions. That is roughly the annual emissions of nearly 216 million cars on the road. But the true figure is likely higher.

These staggering numbers make it clear that financial services and organisations play a pivotal role in the fight against climate change. Just as importantly, they can make a big difference in other areas beyond the environment.

From gender equality to corporate transparency, companies today are expected to place environmental, social, and governance (ESG) issues at the core of their business objectives. As a key source of funding for many sectors, financial institutions wield much power in effecting the desired changes. 

While having to address their own ESG impacts, financial services organisations also have the unique opportunity to finance the world’s ESG projects at scale.

Staying trendy and following regulations

ESG is the key buzzword of today’s investment world, with people increasingly prioritising values over profits when deciding where to place their money. Younger investors, in particular, are spurring the growth of ESG investing. 

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

“We see increasing trends in the investment space whereby consumers are looking at investment funds embedding ESG considerations,” said AIA Singapore’s Chief Investment Officer Liu Chun-Yen. “If we haven’t been on this journey, we’ll be missing out on a major customer trend.”

But ESG goals are not only good to have. Increasingly, they are also must-haves. The past decade has seen an uptick in ESG-focused regulations – there were more than 200 new global regulations in 2020, up from 128 in 2019.

For instance, the Monetary Authority of Singapore – the country’s financial regulator – has set up a Green Finance Industry Taskforce that aims to accelerate green finance nationwide, such as by improving disclosures among financial institutions.

In 2021, it rolled out a guide that outlines specific climate-related disclosure practices. This aims to help improve the quality and consistency of climate disclosures across the entire sector, paving the way for better standardisation when it comes to ESG issues.

ESG’s key challenges

But adopting ESG programmes can be challenging for companies. One of the biggest difficulties is trying to incorporate ESG initiatives into their core businesses, said National Australia Bank’s (NAB) Non-Executive Director Ann Sherry AO.

“In many organisations, I still see it (ESG) sitting as a core central function that advises the businesses, but sits outside the decision-making process,” she observed. “ESG needs to be embedded within the business and strategy.”

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

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

Moving too quickly also runs the risk of greenwashing, where products labelled as green or sustainable are actually not.

And while plenty of regulations are popping up in a bid to enforce ESG, this 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 led to concerns about organisations reporting different things, noted Sherry. “We don’t want to be accused of reporting stuff that over-promises or makes us look good, when we need to be consistent across as many sectors as possible,” she said.

“That is the outstanding challenge – to get consistency of measurements that everybody is accountable for.”

Fostering collaboration and building capabilities

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

First, the top brass has to act. “The tone from the top is crucial,” said Liu. “The board needs to start forming the strategies. The group executive committee needs to embrace and embed ESG in these strategies… that’s how to kick off and generate momentum.”

Having ESG embedded in all levels of the organisations was how AIA came to successfully launch its 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.

While the board of directors conceptualised the core ESG strategies, having individual ESG management committees across its local business units allowed AIA to implement this enormous mission on the ground in various countries.

Second, change needs to come from within. “We need our people across all departments, from financial services to business technology, to be understanding of this issue (ESG targets),” said Herd.

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

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

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

For instance, NAB is supporting 100 of its largest greenhouse gas-emitting customers in developing or improving their low-carbon transition plans by 2023. “It’s about finding the areas where you think you can make the most difference, and focusing on those areas,” said Sherry.

While pursuing ESG goals takes time and entails many challenges, taking the first step in this transformation journey is crucial. “Doing nothing is currently the biggest risk in the current environment,” said Sherry. “Most of our customers want to transition (to ESG), and they need help to do it.”

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