Future-proofing your business: the financial sector’s ESG puzzle29.09.2021by Panikos Teklos
In the face of pandemic-related disruptions and accelerations, the financial sector is increasingly recognising the need to integrate social and environmental issues in the way it operates.
The credibility of a modern organisation partly lies in its ability to become more ethical and responsible, while showing awareness of and engaging in this century’s pressing challenges.
Our mission, as leaders, is to promote and develop a responsible economy, and in particular to reflect on climate risks, how to assess them in order to better contain them, while emphasizing on all aspects of ESG.
This requires a new set of lenses, where more relevant criteria are considered for designing growth strategies and setting goals. This new approach was coined by experts as the triple bottom line: a balanced approach to People, Profit, and Planet. This means that businesses are expected to be more purpose-driven and need to start creating value on the long term, including relationships and trust with stakeholders, be they competitors, regulators, or the community.
The pandemic has led most of the financial sector to rebalance portfolios and it acted as a catalyst in the transition to more sustainability. The new belief is that a good ESG score means resilience and good performance over time. As climate, reputational or social risks have gained importance in investor selectivity, they need to be factored into decision-making. Therefore, integrating ESG into your investment decisions will not only make a financial institution relevant to current trends, but most importantly it will help mitigate these long-term risks, including climate change, corporate governance standards or labour-management.
Beyond the ESG acronym: putting all stakeholders at the heart of your agenda
Looking at the financial sector through the ESG lens is a relatively new exercise which requires some translation into context:
The “Environment” factor is driven by major institutional flows, which are mostly policy-driven and seeking the decarbonization of their investments, through existing or future tech innovation.
The “Social” factor is often downplayed or ignored but plays such an essential role in quality and safety of a company’s people and products, and by extension, the customer’s safety and satisfaction.
Finally, “Governance” has always been at the heart of stock market performance: it is the transmission belt between the company’s strategy and its deployment in markets. Results depend often more on good execution, and therefore on good governance.
There is enough awareness in the markets for players to trust the positive impact of low-carbon investment products and encourage their adoption. ESG criteria have become an essential tool in driving values-based investment decisions and risk ratings by MSCI, Refinitiv or Sustainalytics already provide a solid framework for assessing such criteria and provide visibility and consensus on the sustainability performance of a stock or an organisation.
Bloomberg Intelligence recently reported that ESG assets could hit $53 trillion by 2025, a third of global AUM, with equity funds being the most popular asset class for ESG investors. But so far, on the online brokerage side of the sector, the key players have been dormant on the issue of sustainability, which can be explained by the inherent short-termist nature of trading CFDs. Yet, there are ways to push for ESG integration at both entity and product level.
Axiance has recently started offering financial instruments with ESG scores from leading sustainability ratings and data provider MSCI. Giving the opportunity to a client to single out green investment products is already a big step, particularly in a sector that is still not facing any sustainability requirements at the moment.
Non-financial disclosure and staying ahead of the curve
Amidst new circumstances, like the rise in shareholder activism and new climate-centric regulations, investors are bringing more transparency to their portfolio from an ESG and essentially environmental point of view. This includes calculating, for example, the carbon footprint of their portfolio, and these reports are made public. Such a level of transparency will make it much easier for an institutional client looking to make responsible investment choices.
Within the priorities set out by the European Green Deal and a general effort to redirect capital into sustainable investment, three key EU regulations (the EU Taxonomy, the Sustainable Finance Disclosure Regulation and the Non-Financial Reporting Directive) entered into force and have been posing an adaptation challenge for the financial sector. Even though the scope of such regulations is still limited to mainly financial advisors and asset managers, the rest of the sector should prepare for the next waves of implementation, as this will determine who stays ahead of the curve and who spends capital on catching up.
Communicating with intent
Despite deploying a strong sustainability strategy and openly committing to climate goals, Danone’s CEO Pierre Fabre was evicted after poor results by the group. The organisation was set to become purpose-driven, in tune with this decade’s social and climate goals, so what went wrong? Communication.
Communication still plays a major role in the shaping of the ESG identity of an organisation. The case of Danone lacked efficient marketing to the public and clear signalling to shareholders, because it takes a good pitch to sell the idea that you can do well by doing right, while accepting that the next several quarterly earnings might drop.
Selling climate activism means selling climate investing. But signalling or greenwashing won’t take you far, the story needs to go beyond the marketing department and become a cause championed at all levels in an organisation.
Creating shared value
A modern organisation can be called as such once it is fully capable to comprehend that beyond environmental issues, ESG should permeate through people management and recruitment. Overlooking things like gender balance, diversity, equal pay and training is a strategic mistake nowadays.
Managing the “people risk” is instrumental to growth and sustainability amidst an uncertain economic and social context. The 2021 Mercer Global Talent Trends study identifies empathy towards employees as a top leadership priority in 2020, stating that organizations that integrate ESG into CEO agendas are more likely to report increased revenue growth.
In an organisation like Axiance, ensuring the quality of life of our employees, both in the office and at home is a priority. We make life easier for our employees who have young children, we promote physical activity and as many meetings as possible in our premises.
From the very doorstep, candidates should feel that their values match the company they’re approaching. This includes what personal and professional growth options are available. Axiance academy is a perfect example of transitioning from cookie-cutter financial services firms to community-shaped organisations in constant adaptation.
Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances, or needs.