Financial institutions are expected to take the interests of various stakeholders into account in their investment decisions, to make a positive contribution to sustainability.
The financial sector finances more than 80% of the economy, which means it can have a major impact on making society more sustainable, by informing, inspiring and motivating its customers. By providing direction and being transparent on the considerations behind investment decisions, the sector can make a significant contribution to the transition to a sustainable economy. KPMG Sustainability has identified three significant factors that are forcing financial institutions to pay more attention to ESG factors: (1) risks and opportunities; (2) legislation and regulations; and (3) expectations of stakeholders. In this blog post, we discuss the pressure from stakeholders.
Stakeholders or interested parties are organizations or individuals who have an interest in an organization’s decisions or activities and represent 'the society' that financial institutions have to deal with. Each of these parties has different interest, some of which may even conflict at times. What they see as the most high priority issues differs from stakeholder to stakeholder. These issues range from climate change and biodiversity, human rights and working conditions to remuneration policy and governance. How stakeholders try to exert influence also differs.
We have seen an increase in the expectations of the various stakeholders in terms of contributions to sustainability, an increase that was particularly marked after the financial crisis. Although trust in the financial sector has improved in recent years, the 2019 Edelman Trust Barometer reveals that trust is still low. In fact, it enjoys the lowest trust of any sector.[i] The limited transparency of financial products and still excessive senior executive pay go a long way to explain this lack of trust. Financial institutions are expected to take the interests of their various stakeholders into account when making investment decisions and/or granting loans to make a positive contribution to sustainability.
The expectations of stakeholders are diverse. An increasing number participants in pension funds want pension money to 'do good', but without sacrificing financial returns. Pension funds are receiving more and more questions about the sustainable nature of their investments. For example, in its Sustainable and Responsible Investment Report 2018 pension fund ABP reports that it received considerably more emails and letters in 2018 than in previous years. These messages were mainly about investments in tobacco and nuclear weapons, followed by investments in palm oil and in Israeli companies.[ii]
Banking clients also count on 'their' bank to take environmental and social aspects into account when granting loans. Banks are now communicating more about how they integrate sustainability into their processes and are increasingly profiling themselves in the media as sustainable to retain and/or win customers. Banks with a sustainable character, such as ASN and Triodos, are showing significantly greater growth than the large banks.
NGOs and the media play a significant role when it comes to influencing consumers. They often focus on transparency and a better understanding of the positive and negative impact of investments and/or financing on the environment and society as a whole. NGOs try to raise awareness among consumers and encourage them to use their influence by signing petitions and/or switching banks. One example of this is the 'I'm switching banks' week that has now been declared several times in the Netherlands. After the substantial salary increases for the senior executives of ING and ABN Amro, some forty percent of people said they were looking for another bank in an NOS poll.
Another group of key stakeholders are current and future employees. Responsible business practices are playing an increasingly important role in the choice of an employer. This is particularly true for millennials. The global HP Workforce survey of 20,000 participants revealed that 45 percent of respondents consider sustainability to be an important aspect when choosing an organization to work for.[iii] Millennials prefer to work for organizations with a clear and honest story and sustainable business operations.
It can be difficult to identify all the different interests and weigh them against each other. Interests may conflict with each other and expectations can sometimes be realistic (for now). Nevertheless, communicating transparently about an institution’s sustainability strategy, as well as demonstrating its impact and results are important factors for regaining society's trust in the sector. The financial institutions that are able to respond well to these expectations and integrate them into their day-to-day decision-making are the one that will be in a better position retain customers and employees.
This blog post is the second of a series of three posts on the importance of ESG integration for the financial sector. The other blogs focus on: (1) Risks and Opportunities, and (2) Laws and regulations.
KPMG organizes the "ESG-compliance masterclass" in September/October: ESG Compliance Masterclass voor pensioenfondsen.
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