Thanks to recent legislation and regulations, ESG integration is no longer a matter of choice. At KPMG, we expect the bar for ESG integration to be raised even higher in the coming years.
Over the past few years, we have seen a huge increase the general public's interest in ESG issues, but legislators and regulators have now set their sights firmly on these issues. As a result, financial institutions are being forced to take ESG integration a lot more seriously. What this means is that ESG integration is no longer a matter of choice. In this blog post we: (a) summarize recent developments in legislation and regulations, and (b) explain why we believe that financial institutions need to prepare themselves for even more far-reaching legislation and regulations.
ESG integration has not been voluntary for quite a while. As early as 2014, ESG issues were explicitly included in the Pensions Act and the Compulsory Occupational Pension Schemes Act. Since then, pension funds have had to state in their annual report how they take the environment, climate, human rights and social relations into account in their investment strategy.
Recent years have seen additional legislation and regulations on ESG integration for banks, insurers and pension funds. The figure below shows a summary of significant recent developments.
The majority of financial institutions have already implemented some form of ESG strategy. However, we have noticed that the ESG strategies of many Dutch financial institutions are not fully in line with (new) legislation and regulations. This includes omissions in the following areas:
What is more, at KPMG we expect legislators and regulators to raise the bar even higher in the coming years, because (a) the general public has become increasingly aware of ESG issues (see our previous blog: Stakeholders demand sustainability), (b) ESG issues will become increasingly urgent (e.g. the effects of climate change will become increasingly visible) and (c) ESG issues will increasingly translate into significant financial risks for institutions (see our previous blog: Underestimated risks and untapped opportunities).
Banks, insurers and pension funds must take this into account. They will need to review their ESG policies regularly to ensure that they still comply with the latest and upcoming legislation and regulations. And they need to approach this process from a broader perspective, because other stakeholders are also making increasing demands on the ESG integration front. This is the first step in a regular cycle that we recommend implementing if financial institutions want to continue to comply with standards that are set to become ever stricter in the future (see figure below).
This blog post is the final part of a three-part series on the importance of ESG integration for the financial sector. The other blogs focus on: ‘Why financial institutions still undervalue ESG-related risks’ and ‘The growing pressure on financial institutions from stakeholders’
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