ESG is an abbreviation that originates from the “Who Cares Wins” conference in 2005 which sought to understand the role environmental, social and governance drivers play in the context of long-term investment. The term encompasses a wide variety of intangible factors and attempts to assess the impact they will have on tangible assets and investments. These data metrics often result in what could be described as a credit score of sorts for factors such as climate change, regulatory shifts and variations in public opinion.
How does ESG affect business?
In fewer than 20 years, the ESG movement has grown from a corporate social responsibility initiative launched by the United Nations into a global phenomenon impacting more than US$30 trillion in assets under management with Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability‐related disclosures in the financial services sector being introduced.
ESG should be used within a company in an effort to quantify environmental, social and corporate governance (ESG) criteria to ensure they are running responsibly. Fund managers use ESG considerations to identify risks and opportunities that could affect a firm’s long-term sustainability and should be considered a key part of the due diligence process prior to an investment.
With two main policy frameworks, Sustainable Finance Roadmap (UK) and Sustainable Finance Disclosure Roadmap (EU), coming into play as early as June 2022, ESG will soon be a requirement for those operating within Financial Services. A key element of complying with this taxonomy, on either the UK or EU side, will be that it will judge whether investments can be defined as environmentally sustainable and, as such, if they are eligible for access to sustainable finance which is currently valued by the UN at £2.3 trillion.
The number of financial businesses that integrate ESG in their decision-making processes is on the rise globally, and it is expected to increase drastically in a post-COVID economy as studies have shown that companies with a high ESG rating held up better than their competitors during the crisis.
How Does ESG Fit into Financial Services?
Financial Services executives should move beyond the current view of ESG and begin forward-thinking strategically about how their companies can anticipate and respond. Today the industry has an opportunity to leverage innovative technology and explore new partnerships to address major societal issues, make new markets, and generate profit in collaboration with multiple stakeholder communities whilst proactively rebuilding trust in institutions.
Financial Services should be looking to approach ESG risk in a holistic way when embedding their risk management frameworks. The process should include adjusting business and risk strategies and corresponding risk statements, ensuring roles and responsibilities are transparent throughout all lines of risk defence, in preparation for existing and expected risks. While ESG risk is not considered a stand-alone risk type, it does influence financial and non-financial risks present in Financial Services. Hence, risk management methods and processes must be amended, considering the complicated cause and effect relationships across risk types.
What Does ESG Mean for Compliance Teams?
The more we understand the importance of ESG responsibility, the more ESG gains momentum and as such, the Financial Services industry is stepping up to the forefront. Sadly, there is no panacea when it comes to implementing ESG for organizations. Each business has its own priorities, size, and business objectives to shape how they manage ESG commitments, and thus their compliance and tracking of such obligations. Although the compliance department is undoubtedly best equipped to execute many of the necessary functions and processes surrounding ESG, other areas of the organisation must also play a fundamentally important role in embracing ESG.
Sustainability Compliance: Within the UK market, the FCA will be responsible for the regulation of products marketed as being sustainable investments within the bound of the Sustainable Finance Roadmap. This will be an effort to prevent ‘greenwashing’ – the presentation of non-ESG products as being ESG – with non-compliant organisations at risk of being fined and/or sanctioned. With one eye upon approaching regulatory changes linked to SFR, it ought to be noted that whilst the overarching goals have been stated the terms and method of implementation are, at this time, highly ambiguous. The main aim is to ensure that disclosure is focused on a company’s activities, rather than the regulation of those activities themselves. It is therefore crucial that Compliance and Risk Managers ensure that they have robust processes for data collection, agile reporting, and an equipped and competent team in place to avoid running afoul of changes in a fast-paced regulatory environment. Failure to comply will result not only in fines but in reputational damage in a market ever-growing in social conscience; potentially upsetting investors and placing pressure on their bottom line.
Legal Compliance: Investigations into ESG-related breaches and issued fines have significantly increased in recent years. Gender pay gap reporting is now compulsory for UK companies that have over 250 employees, similar legislation applies in some states in the US and Australia. While the level of penalties does vary considerably depending on the country, the willingness to impose top-level fines has increased across the board, with enforcement restarting in October 2021 following a pause forced by COVID-19.
How Will ESG Impact Recruitment?
The demand for individuals with experience and skills concerning ESG issues has reached an all-time high, exceeding the existing number of qualified people available in this market contributing to the rise in ESG salary rates. With climate change now firmly embedded in future strategies, alongside other generational issues, the race for and shortage of talent in ESG presents a particular challenge to the development of climate and sustainability solutions. It should also be noted that many companies have changed their approach to bonuses with these now being awarded based on ESG targets.
ESG is now considered the baseline for young new talent coming through. There has been a significant shift in the way candidates view potential employers, placing greater importance upon social responsibility, choosing to look for roles with companies that have shown themselves to be on the front foot in relation to ESG with clear strategies that they articulate at interview. Candidates are making conscious decisions to ‘go greener’ in direct correlation with shifts in societal attitudes to the issues of the day (e.g. Diversity & Inclusion, Climate Change, Human Rights etc).
Look to the Future
Now is the time to future-proof your business with a strong ESG strategy. Building a forward-thinking and innovative business that will attract like-minded individuals, creating long-term success. Want to know more about trends within the compliance market? Keep an eye out for our 2021/22 Compliance Professionals Salary Survey.
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With the demand for experienced individuals and skills concerning ESG issues has reaching an all-time high. We make it our mission to make the compliance recruitment process smooth and simple. For nearly 20 years we have matched highly skilled professionals with leading financial services firms to achieve their mutual ambitions – and are on a first name basis with the most sought-after professionals in the compliance sector.
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