Sustainability and ESG are very much on everyone’s minds at the current time as we come out of COVID-19 pandemic lockdowns and look towards the COP26 UN Climate Conference later this year in Glasgow. 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. Financial institutions (FIs) are at the heart of sustainability to a greater extent than other carbon-dependent industries because the financial system — remembering the pivotal role of capital — is seen as a catalyst for change across the whole economy. FIs are generally ahead of other industry sectors in terms of being subject to detailed sustainability-related regulations.
In this special edition, Eva-Maria Segur Cabanac, a partner in our Vienna office and global sustainability lead for financial institutions, and Jennifer Klass, a partner in our New York office and co-chair of the financial regulation and enforcement practice in North America, talk with Ying Yi Liew on how the COVID-19 pandemic led to the prioritization of Environmental, Social, and Governance (ESG) considerations among FIs.
Key highlights of the episode include:
- Sustainability for FIs goes beyond environmental and even social and governance factors. This requires their leadership to think holistically about the business and the ethical drivers – so that not only are they profitable – but that financial services make a positive contribution to society as a whole.
- While sustainability has seen a tremendous rise in awareness since 2015 with the COVID-19 pandemic providing added impetus, progress is being slowed by the lack of common, consistent, international standards over disclosure and classification.
- New technologies will certainly impact how FIs think about ESG. Artificial intelligence (AI) can help make sense of unstructured and incompatible data sets allowing asset managers to review and score for ESG risk. It can help counter greenwashing by assessing data quality and excluding unreliable sources.
- Outside of environmental considerations – social and governance aspects are also very important for FIs. Diversity and inclusiveness are seen as characteristics of healthy cultures reducing the potential for harm to consumers and markets. FIs should expect their supervisors to ask for more data on these topics and probe them on their progress.
This episode also covers how FIs are affected by the prioritization of ESG factors, possible exposure to litigation and enforcement, disclosure, and progress around taxonomy and classification in different jurisdictions.
You can also read about the accompanying publication Sustainability in Financial Institutions, the sixth installment in our on-going Finding Balance series where we map the post-pandemic environment for FIs.