We are living in exceptionally challenging times. COVID-19 is severely testing the resilience of individuals and families, economies and businesses. As I noted in my blog, financial services institutions are on the front line of helping economies cope, providing liquidity and support to corporate and retail customers.
However, as governments, businesses and citizens start to look towards the ‘new reality’ of life after COVID-19, considerations related to environmental, social and governance (ESG) issues are rising up the agenda. As Alok Sharma, the UK Climate Secretary and president of COP26, recently noted, “the world must work together to support a green and resilient recovery, which leaves no one behind1." Financial services organisations will be expected to be at the forefront.
Indeed the days where companies could be evaluated, most predominately by their growth, profits and go-forward prospects are now gone. Today, what people really want to know about is the company’s culture, values and purpose. That is forcing a massive change in the way financial services firms operate and compete.
As we move through the current pandemic we see the ESG agenda becoming even more relevant.
... ESG is the new lens through which companies will be evaluated, and those that not only embrace the principles, but positively demonstrate their commitment through action, will be the clear winners going forward.
It’s not just that customers, regulators and investors are becoming more socially- and environmentally-conscious (and they are). It’s also that financial services firms (and their supervisors) now recognise that ESG is the new lens through which companies will be evaluated, and those that not only embrace the principles, but positively demonstrate their commitment through action, will be clear winners going forward.
My conversations with executives suggest many financial services firms are starting to embrace the ESG agenda in earnest. The reality is that, in the past, most financial services firms were approaching the issues rather reactively; the focus was often on building a ‘defendable position’ that could be brandished if and when the business was challenged. ESG was viewed as little more than a reputational risk to be managed.
Now, however, asset managers, insurers and banks are starting to see ESG as a centrist principle (much like cost, compliance and customer experience) that must be incorporated into the very core of the organisation’s decision‑making and strategic processes. It is the lens through which the board and the executive team view their future. It is the prism through which they demonstrate their values and purpose. Goldman Sachs is a prime example of an organisation placing ESG at the centre of their strategy.
While it would be nice to think that financial services executives are embracing the ESG agenda for purely altruistic reasons, my conversations with industry leaders suggest many see significant ‘upside’ to taking a leadership position now.
In part, the leaders are seeking to take advantage of a clear shift in social expectations. They understand that customers are increasingly judging companies based on their action — both in dealing equitably with customers harmed by COVID-19 and on the ESG agenda. They see growing demand for ESG-linked products and services. They assume (likely correctly) that their focus on ESG will bring them new customers, new capital and new revenue streams.
Many also recognise that regulators, policy makers and oversight authorities are starting to see ESG as part of the larger systemic risk environment. While formal regulation has (to date) been slow to emerge, the leading financial services organisations are striving to get out ahead of the regulatory stick. They are looking to be masters of their own destiny.
Some also see action on the ESG agenda as a way to help solve their human capital and intellectual property challenges. They understand that the best and brightest of today’s talent want to contribute to more than shareholder returns; they are looking for companies that share their own personal purpose and values. Smart financial services firms are using the ESG agenda to attract the talent and capabilities they need going forward.
At the end of the day, however, most financial services executives understand that new risks bring the potential for new rewards. But reaping those rewards requires them to gain significant experience and capabilities ahead of their competitors. The skills they develop, the partnerships they build and the data they capture in their ESG activities today will allow them to identify those new opportunities and maximise their rewards tomorrow.
However, as this edition of Frontiers in Finance clearly illustrates, the path towards creating value from ESG is far from clear. COVID-19 may have focused minds on the need for faster action on the ESG agenda, but it has also demonstrated that there are many complexities and considerations that must be understood and managed. Financial services leaders will face some daunting questions. Indeed, many financial services executives are not even sure where they should start.
My advice is to begin with an introspective look at your organisation, its culture and its values to define a clear purpose around the ESG agenda. Consider what customers, investors and regulators will expect from your organisation in the future. Figure out how you will measure your success and progress. Then translate that purpose into specific actions and steps that demonstrate you mean what you say.
Perhaps most importantly, my counsel to financial services leaders is to just get on with it. In this arena, actions speak much louder than words. The winners will not be those that talked the loudest but rather those that made the most impact.