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Insight: Why are ESG factors so important for Financial Institutions?

Increasingly so, regulatory and reporting requirements focus on the environmental, social, and governance (ESG) impact that organisations are making through their professional practice.

 

In a recent survey by Marsh, 80% of respondents in the financial services sector ranked climate change and ESG as either an important, or the most important, issue for their operations.

 

Never more so has an ESG strategy been more critical for businesses, particularly those regulated within the financial sector. Understanding the impact that these factors will have on their business activity is encouraging financial services firms to make big changes.

 

Earlier in 2021, the FCA issued its “Dear chair” letter, annexing a set of guiding principles, encompassing the FCA’s current expectations, to help firms apply their existing rules to their practice. Companies applying an FCA-approved approach to their business practices helps them to develop high-quality financial offerings whilst protecting their consumers.

 

Companies that cannot demonstrate an ESG strategy will be putting the viability and resilience of their businesses at risk.

 

According to recent insight from Marsh, financial institutions must typically consider the following ESG risks:

 

Environmental

 

This criterion evaluates a firm’s impact on the planet, and includes:

 

  • Calculation of a company’s total emissions, as a measure of its commitment to addressing climate change.
  • An entity’s plans for transitioning to low-carbon usage to ensure energy security.
  • Monitoring and disclosure of greenhouse gas (GHG) emissions.
  • Establishing targets for pollution and waste practices.
  • Projects they invest in or loan to and the impact of those projects.

 

Social

 

This set of criteria examines how a business treats its employees and the surrounding community. It includes:

 

  • Labour management policies.
  • Health, safety, and wellbeing commitments.
  • Impacts an organization has on the local community and whether those effects are beneficial or adverse.
  • Labour standards of a company’s suppliers.

 

Governance

 

This part of the strategy looks at how a company is governed and the practices it uses. It looks at the board structure – diversity, transparency, audit quality and board remuneration.

 

What actions need to be taken?

 

AS ESG factors become of more and more importance to regulators, clients, and firms alike, conducive actions must be taken for the greater good. For firms, these include:

 

  • Assess what the implications of ESG within your firm will look like. This can be done with the help of industry data and models, as well as by taking into consideration the perspectives of key stakeholders.
  • Consider the means to control the physical, transitional and reputational risks associated with ESG for your business.
  • Understand the requirement for external reporting. Many financial institutions around the world are aligning to reporting frameworks, such as the Task Force on Climate-related Financial Disclosures (TCFD) and the Global Reporting Initiative (GRI). The TCFD, for example, sets out 11 recommended disclosures under four pillars, and working under such frameworks supports the execution of ESG objectives within your firm.

 

For the latest on the FCA’s expectations on the design, delivery and disclosure of ESG and sustainable investment funds, visit the FCA’s website.

 

What actions are we taking?

 

As part of Vero’s ‘Vision 22’ initiative, Vero is modelling our evolution of existing ESG standards on the best practice set out within the UN Global Compact.

We have traditionally demonstrated sound practice and high levels of environmental awareness in all areas where our people, processes or services may impact the environment, although we are currently refining our vision and objectives as we work towards carbon neutrality both within our own organisation, and also within our supply chains. The objectives are being enshrined within Vero’s ‘Vision 22’ initiative, which we will share with clients in the early part of 2022.

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