Since the global financial crisis of 2008, public awareness of corporate financial behaviours has increased significantly. The incorporation of environmental, social and governance (ESG) factors within the corporate landscape is a direct result of the public interest around a culture of sustainability, accountability and a financial system that is effectively governed.
What lies beneath is swathe of regulation, investment decisions, governmental and social expectations. Financial institutions must be adequately prepared to anticipate, analyse and implement this sea change of regulatory activity into their policy and control frameworks.
The three pillars of ESG
The term ESG spans the length and breadth of financial services, from consumer-driven investments and sustainability, to the diversity of company boards, and the reduction of carbon emissions. It comprises three distinct pillars, all of which are equally important to forming a holistic ESG policy.
The impact that a company has on the environment and on climate change, including its energy consumption, waste disposal practices, carbon emission levels and sustainability of investments.
The promotion of inclusivity, diversity, and equality within a company, and the treatment and safety of employees.
The manner in which a company governs itself, makes ethical decisions, deals with conflicts of interest, meets the needs of stakeholders, and complies with the laws of its jurisdiction.
Why does climate change matter for financial services?
Climate change and sustainable finance matters for financial services for myriad reasons. The motivating factors come mainly from a societal awakening around sustainability, climate change and diversity, paired with a shifting demographic of investors.
ESG regulation is not primarily investor-driven. Climate change presents a number of risks, not only those that threaten the environment. It poses physical risks to property and assets – which in-turn affects insurance claims and can lower collateral value. It also opens up the possibility of devaluation as old assets such as fossil fuels lose their value, in turn reducing the value of associated loans and investments.