Sustainability poses both risk and opportunity for financial institutions (FIs).
Although sustainability is not a new focus area for enterprises, it is important to note that FIs consider other priorities and motivations. A recent global survey of institutional investors found that the top motivations for ESG investing were improved long-term returns, brand and reputation, and reduced investment risk.[i] For the first item -improving long-term returns, short-termism has for many years been viewed as an important barrier to companies putting sustainability at the core of their strategy and decision making. Pressure to prioritize quarterly earnings can among other matters discourage businesses from investing in the development of sustainable products.[ii]
The key driver in recent years is the 2015 Paris Agreement, an international treaty on climate change that seeks to limit global warming to well below 2, and preferably below 1.5 degrees celsius compared to pre-industrial levels. To do so, net-zero carbon emissions are required by 2050 if not before. The Paris Agreement specifically identifies finance as having a key role in mitigating the effects of global warming as large scale investments are needed to significantly cut emissions.[iii]
The new installment – Sustainability in Financial Institutions – examines different aspects of sustainability relevant for FIs. Among the key takeaways include:
- Financial institutions are critical players in the transition to a carbon neutral economy and because of their role in allocating capital can act as a catalyst to achieving better environmental, social and governance (ESG) outcomes in society generally.
- Reflecting their role in mediating the allocation of capital and their highly regulated nature, sustainability for financial institutions extends beyond climate change, and even further than wider ESG concerns, to encompass the very nature of their contribution to the economy and society as a whole.
- Sustainability has seen a tremendous rise in awareness since 2015 with the COVID-19 pandemic providing added impetus, yet progress is slowed by the lack of common, consistent, international standards over disclosure and classification.
- Sustainability policies are a necessary response to climate change and to better manage social and governance risks faced by financial institutions, while affording the opportunity to offer new products and services, allowing the most agile businesses to differentiate themselves from their competitors.
In common with other sectors of the economy, there is increasing commercial and competitive pressure from investors and those in positions of stewardship to favor green and sustainable investment. FIs also need to adopt high standards of transparency in the process.
You can read our full report – Finding Balance: Sustainability in Financial Institutions – to see how sustainability is impacting FIs – including risks, industry developments, regulatory activity, and other important drivers shaping both corporate and regulatory action around the topic.
You can also read our previous installments focused on different sub-sectors: Banks, Financial Sponsors, Insurance and Financial Infrastructure, or visit the page to access additional resources – including videos and podcasts.
[i] United Nations, Global Compact, Short-Termism in Financial Markets [site accessed 19 April 2021].
[ii]The ESG Global Survey, 2019
[iii] United Nations, The Paris Agreement, 2015.
