The Financial Sector Often Only Sees ESG as a Mandatory Program

There is no longer any way around the issue of ESG for companies. Products and processes must become more sustainable, otherwise there could be trouble: customers could turn away, employees are also increasingly preferring companies that are well-positioned in a socially and sustainably manner, and last but not least, a company is in particular focus of supervisory authorities and interest groups such as investors.

You don’t have to be a great visionary to come to the conclusion: Anyone who actively promotes the implementation of ESG measures and sees this as a growth opportunity will make an important contribution to the future success of the company.

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ESG projects in the financial sector are driven by law

Therefore, the results of a global survey by Simmons & Simmons among 600 C-level executives from various industries are particularly striking with regard to the financial industry. For more than three quarters (82 percent) of the financial companies surveyed, investments in sustainability are primarily driven by obligations to legislators or investors; only 69 percent agree with the statement that their company primarily invests in sustainable projects in order to achieve growth goals such as increasing to track profits.

In view of advancing climate change, companies in almost all industries are gradually readjusting their business models from a sustainability perspective. In this context, sustainability management in banks has also become increasingly important in recent years.

In addition to the European and national regulations that must be taken into account across all sectors with the aim of gradually reducing greenhouse gas emissions up to climate neutrality, the sustainable finance initiatives in particular are of practical relevance from a functional perspective, as are the announcements from the ECB, EBA and BaFin on dealing with sustainability risks from an industry-specific perspective.

For other sectors such as healthcare, technology and telecommunications, energy as well as real estate and infrastructure, the situation is the other way round – for them the focus is primarily on growth opportunities in connection with ESG activities.

Managers know about opportunities

Interestingly, executives in the financial sector are, in theory, quite convinced that a sustainable position has positive effects: 89 percent of them agree that companies that invest most effectively in sustainability will perform best financially in the next five to ten years become. 79 percent also assume that commitment to sustainability can open up new consumer markets.

But last but not least, a certain attitude seems to be a hindrance: According to this, 42 percent are convinced that progress in the area of ​​sustainability is hindered by managers who only see this as checking off requirements and not as an opportunity.

It also shows that the topic of ESG in the financial sector is associated with risks – significantly more so than in other sectors. Worries about legal disputes or penalties due to non-compliance with ESG regulations are particularly pronounced (58 percent), followed by worries about losing investments due to insufficient evidence of sustainable actions (47 percent).

Greenwashing allegations feared

41 percent of financial companies fear loss of reputation due to possible perception as greenwashers. When it comes to the topic of greenwashing, many of them also see a particularly open side: only 59 percent see their own company as being well positioned to meet the applicable regulations relating to greenwashing. For comparison: 84 percent of financial companies see themselves as well positioned when it comes to meeting regulations relating to diversity and inclusion.

When it comes to greenwashing, the dilemma becomes particularly clear for the financial sector. On the one hand, the regulations there are particularly comprehensive, and on the other hand, the regulatory developments are also very dynamic. Not every bank or asset manager is clear about where greenwashing could already begin. Anyone who interprets the regulatory framework too broadly could quickly find themselves exposed to accusations.

Dangers of Greenhushing

In general, the maxim that applies to a company when it comes to ESG is that what it says is correct and that it does what it says. Nevertheless, a trend towards so-called greenhushing can be observed more and more frequently: many companies are becoming more and more reluctant to talk about sustainable activities in order not to make themselves vulnerable. Only what is strictly obligatory will be done and published. However, there can be pitfalls lurking here too – because what is not explicitly said is now being scrutinized more critically.

What needs to be done to deal with these increasing uncertainties regarding ESG? On the one hand, it is important to actively engage with existing and upcoming regulations. Anyone who does this with foresight can also align their value chain accordingly at an early stage. On the other hand, financial companies also need to strengthen their own competencies in the area of ​​ESG. According to the survey, 61 percent of those surveyed want to do this in order to better position themselves in the area of ​​sustainability.

ESG requirements need more clarity

Another important point is to gain more clarity on the criteria for meeting ESG requirements. Every second financial company would like to have a closer dialogue with lawmakers, and 45 percent want clearer requirements regarding the data that must be provided to prove compliance with sustainability standards.

Conclusion : In our opinion, those responsible in the financial sector are quite clear that sustainability is, and even must be, a crucial part of their company’s core strategy. However, there is a certain risk that ESG efforts will acquire a negative connotation due to the major regulatory requirements – and the associated uncertainties.

Actively dealing with ESG challenges and strengthening competencies are important pillars for taking the path to sustainability in a positive, forward-looking and growth-oriented manner.

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(Featured image by Photo Boards via Unsplash)

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First published in Springer Professional. A third-party contributor translated and adapted the articles from the originals. In case of discrepancy, the originals will prevail.

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