Now your (consumer) duty is done – what’s next for ESG in financial services?

By Graham Precey, Senior ESG Advisor and Vivian Lai, Senior Account Manager

It’s been a busy month for financial services companies proving they are meeting their consumer duty requirements. Now that most are complying with their responsibilities to look after customers’ finances, the development of broader ESG strategies will take centre stage again.

ESG remains a key priority and requirement for audiences. Companies need to demonstrate their own ESG transition but also that of the financial services industry, and wider economy. Supplying finance and funding to the economy is the fundamental social utility of the financial services industry, in a similar way to energy companies supplying power to businesses and organisations.

So how can this core social utility translate into ESG actions?

There are three areas where leading financial services companies are developing their thinking:

1. ESG and the balance sheet

For any financial services provider, its own balance sheet should be a clear indicator of where its priorities lie, such as promoting a low carbon future, and moving away from legacy non-ESG-friendly assets promptly yet responsibly. It’s just as important as the products and services it chooses to offer.

Lets take two examples:

• Legal & General Group publishes its UK investment map for all to see which sectors of the economy fit believes need long term finance from its balance sheet.
• Triodos Bank provides its customers with a map of the businesses that it has used their collective deposits to fund.

There are lots of examples of companies that negatively screen areas of the economy and society that money will not go to for example tobacco, carbon intensive industries, human right abuses etc. But we are missing an opportunity. That shows what a company doesn’t believe in.

What does your balance sheet say about how you view the future and how well is that being communicated?

And for wealth managers, is there any disconnect between what you recommend your clients do, and what you’re actually doing? How transparent are you when disclosing your own company investments?

2. Market inclusivity

All financial services businesses must show that their products perform for their customers while the industry has a responsibility to provide relevant products for all.  That’s the duty of providers when state provision is increasingly under strain.

So, expect more investor and regulatory scrutiny on core marketing data that reveals your product take-up versus the national population you serve.

Can you prove that you are making your products and services available to harder-to-reach markets?

3. ESG and cash funds

ESG disclosure and impact has been demanded by investors for a long time but why is the placement of cash into financial institutions not given the same scrutiny?

 A client recently asked their banks, “If we place £1bn of cash with you for a 12-month period what is the ESG impact of that money?” A simple question, you would have thought Wrong.

All the investment banks could play back was, “This is our ESG strategy overall…”

“But what is the ESG impact of our cash placed with you on real businesses? And how does our cash contribute to your ESG strategy?” Then the tumbleweed rolls by…

While we would leave these questions for the banks to answer, perhaps they need to start using a more ESG-focused strategy when they consider putting deposits to work – whether they can “earth” the money into real businesses and have a reasonable return, and assess the scale of lending to ESG-friendly borrowers within regulatory restrictions.

 So, can your business pioneer the ESG’ing of cash?

What next? Be transparent. Be consistent. Be succinct.

Getting your ESG agenda right isn’t easy. But communicating your story effectively can be equally challenging.

Your stakeholders, ranging from governments and investors to clients and the general public, are looking for clear ESG disclosures where they can compare and verify your ESG performance.

Telling your ESG story goes beyond meeting mandatory regulatory requirements. It’s about promoting your growth story and communicating how your company is creating value for stakeholders. The top five questions you should consider in ESG reporting are:

1. What do your stakeholders value and expect?
2. How are your ESG strategy and reporting related to your overall business operations?
3. What content do you need to formulate a credible, tangible ESG report? With what methodology?
4. How viable and widely used are your ESG metrics and disclosure frameworks?
5. What are the best platforms and channels to communicate your ESG story?

Finance services businesses are in the driver’s seat in shaping and accelerating the ESG transition. Companies ought to embrace, and also lead, the transformation by being their own advocates – have a clear position; be transparent; and always communicate.

To find out more about how we can help you tell your ESG story visit our Sustainability page or email our Head of Reinventing Responsibility Helen.Dodd@Instinctif.com