In recent years, environmental, social and governance (ESG) matters have become more important than ever before: regulators are starting to enforce disclosure requirements for organisations, and key stakeholders are asking for increased commitments from businesses. However, these pressures aside, there is also an opportunity for financial institutions (FIs) to turn ESG into powerful benefits.

The increasing interest of the market and regulators in ESG

To report on ESG, companies select an established framework to standardise the reporting and disclosure of ESG metrics. This helps stakeholders understand how an organisation manages risks and opportunities around sustainability issues.

Banks, insurers, asset managers and public companies have been reporting on ESG under these frameworks for several years on a voluntary basis. However, requirements are now shifting and becoming mandatory. As an example, the number of regulations applicable to asset managers have soared with more than 206 pieces worldwide, according to MSCI. ESG regulations are set to progress significantly in the years ahead from jurisdictions around the world.

This interest echoes a consensus from the market, calling for more sustainability commitments from companies in response to the shrinking window of opportunity to prevent the worst consequences of climate change. For instance, 78% of general counsels in mid to large companies report facing pressure to increase their ESG commitments, coming from their own employees, institutional investors or even customers.

Millennial employees in particular want their employer to stand for certain values and consider it as an important aspect of their career choices. In fact, many won’t take a job if a company doesn’t have strong ESG commitments and are willing to take a pay cut to leave for a company that is doing better on ESG.

For consumers, a recent survey from PWC highlighted that around 80% said they are more likely to buy from a company with a strong ESG proposition. At the same time, institutional investors are placing greater emphasis on ESG since the COVID-19 crisis: according to EY, 74% are now more likely to “divest” based on ESG performance.

ESG is here to stay, and financial institutions need to consider it as more than just box-ticking exercise; in fact, ESG represents a true opportunity for FIs.

The link between ESG and financial corporate performance

While there is considerable debate about how to do ESG well, numerous studies have shown that companies with an effective ESG program are rewarded with better financial performance. In 63% of these studies, the results show a positive correlation between ESG and a company’s financial performance over a long-term horizon. Below are the main reasons that explain this correlation according to McKinsey.

Risk

The critical factor is risk management. As regulators and stakeholders demand more accountability and transparency from organisations, businesses with a strong ESG practice will benefit from reduced legal interventions and adverse actions. Moreover, in terms of brand reputation, the risk of having a firm’s value seriously damaged by an ESG scandal will also be minimised.

Top line growth

Businesses will also benefit from greater profitability. A solid ESG proposition attracts more consumers, leading to stronger top line growth and the ability to tap into new markets, as well as expand into existing ones.

Talent

ESG is also a cornerstone to attract and retain talent. Employee welfare, such as health and safety, working hours, diversity and inclusion practices lead to a better experience, boosting motivation and productivity in the workplace.

Cost reduction

Finally, sustainability-driven innovation, which consists of products, services or processes being more resource-efficient, can also reduce costs substantially: implying lower energy consumption, reducing water intake and more.

Given these benefits, FIs should be seeking out corporate customers with a strong ESG proposition. In their lending operations, FIs can gain a clear advantage from a borrower with a good ESG profile:

  • Credit risk mitigation: A borrower is less likely to default on their debt obligations
  • Brand perception: ESG contributes to a more positive image for the lender
  • Commercial opportunity: ESG has the potential to unlock more growth for a company, strengthening the relationship and creating more value for the lender

Financial institutions have a key role to play in financing the green transition. They need to make ESG an integral part of their strategy—not only to respond to the increasing pressure from regulators and stakeholders, but also to capitalise on the benefits of lending money to borrowers with a strong ESG profile.

Learn more about the growing importance of ESG and the benefits that it represents for financial institutions by downloading our ESG infographic.

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