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The Future of ESG in Financial Services

By ISITC | 5 minute read | August 3, 2023

The following thoughts from ISITC’s Environmental, Social & Governance Forum were written by Forum Co-Chairs Lisa Benson of Refinitiv, Richard Fontes of State Street, Wendy Mailot of MFS, Melissa Sternberg of SWIFT, and Grace Kang of Boston Partners.

ISITC is an international trade association founded in North America that focuses on promoting communication standards and best practices in the financial services industry to improve operational efficiency and reduce risk. Their ESG Forum recently offered thoughts on the current state and future trajectory of environmental, social & governance priorities within the financial services sector.

Related: With ESG, the best time to move forward is now

Which area of ESG do you think is progressing the fastest in the industry, and which needs to be given more attention?

For the past several years, the environmental pillar has been receiving the most attention, especially from regulators who are requesting disclosures around factors like greenhouse gas emissions and carbon intensity as core measures of climate risk. Climate data and disclosures are also a key focus for organizations as they work to set clear definitions around ESG measures to ensure the consistency and availability of ESG data across the reporting landscape. Governance metrics have been around for a while: executive pay ratio, board diversity and policy frameworks are a few examples that have been considered by investors for years. The social aspect has been gaining attention in the Diversity, Equity & Inclusion (DEI) space, whereby companies are being asked to report on their diversity for senior positions and those on their boards.

Overall, education is the area most in need of attention. ESG can mean different things to different people, and there is a lot of misinformation about the idea and its initiatives. One such example is greenwashing, whereby companies perpetuate misleading information – or strategically omit details – about ESG performance to make themselves appear more environmentally friendly and sustainable on paper than they might be in practice. The most important thing to do to combat this misinformation spread is to help people understand what ESG is and is not, communicate the risks and opportunities it strives to uncover, and clarify what it means in different contexts in the industry.

How should the industry react to counter-movements such as the anti-ESG backlash from certain market participants?

As with any movement, it’s to be expected that there will be pushback towards the other side of the pendulum too. As questions around ESG are increasingly brought into the spotlight, engagement, open communication and building pathways that improve transparency are all ways to improve education around the matter and ultimately continue movement forward.

While there are products in the market that specifically focus on impact and socially responsible investing, most asset managers understandably need to consider ESG factors alongside traditional measures, such as cash flows, price-to-earnings ratios, risk profiles, etc. There is a place for both of these considerations to coexist, and companies should take care to understand the ESG risks and opportunities they face when making any investment decision. Things like climate change can pose substantial risk for many companies in the long-term if overlooked.

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How have you seen the industry change its attitudes towards DEI in recent years?

DEI initiatives date back to the 1960s, rooted in the civil rights movement. Over the last decade, however, they have become more actionable items on corporate agendas as companies work to ensure that diverse groups are represented in their workplaces. As the research continuously reinforces the competitive advantage of diverse workforces, companies are taking on the responsibility to implement systemic changes to make it happen.

Some of these changes include:

  • Building partnerships earlier in the talent pipeline, starting at the high school level
  • Recruiting from a variety of and diverse colleges, incorporating geography, program majors/concentrations studied, and historical value of schools
  • Ensuring job descriptions are using gender neutral language that attracts and includes diverse talent

Once employees are in the door, the efforts can shift to developing leadership and mentorship programs to support underrepresented groups, focusing on breaking down unconscious bias to ensuring all employees feel included.

A common hesitation among industry players is that they are afraid of ‘failing’ at their DEI initiatives. How can this be combatted to ensure that the industry does not stagnate?

It’s a common refrain and, unfortunately, occasionally used as an excuse for not trying. Diversity is not a win/lose or pass/fail exercise, and it is not something that can be solved overnight. Companies that are serious about DEI know it is a journey and strive to make incremental changes along the way. Measurement is a good place to start; if you don’t know where you are now, you won’t know whether you are making progress. Ongoing training is also important – you can’t expect to move the needle with a onetime unconscious bias class. Allow employees to take a lead in DEI as well. Affinity groups and Employee Resources Groups (ERGs) are great ways to engage employees and encourage everyone to help drive diversity forward.

Related: The value of a diverse workforce in the financial services industry

Do you believe that DEI is a too-often ignored opportunity for the industry to diversify their staff alongside their portfolios to bolster resilience and reduce risk. In other words, should firms take a more economic approach to DEI, or should it be seen as a purely ‘social’ issue?

They are not mutually exclusive. At the end of the day, companies are responsible to their clients, investors and shareholders as well as their employees. If increasing diversity lacked economic sense, it wouldn’t be discussed. Studies have shown diverse companies are more innovative and profitable and have lower employee turnover with an easier time hiring the best employees, which supports DEI as an economic-based approach.

Ultimately, successful DEI initiatives require a whole-company approach. What should those in the spotlight be doing to help create a more equal industry?

It is critical to understand underrepresented people’s barriers to entry so we can change the systems that have gotten us to this place. While you need to have buy-in from leadership to drive change across systems and corporate culture, it is also important to engage employees from a ‘bottoms-up’ perspective, allowing them to help push for those changes. This engagement is frequently led by Employee Resource Groups (ERGs), who represent and give a voice to those who have been negatively impacted by the lack of DEI practices. These ERGs also drive allyship, which helps engage the entire company in support of the advocacy needed to support change.

At the end of the day, successful DEI programs should focus on how the changes are driving the positive impact intended.

This article first appeared in Traders Magazine on July 26, 2023.