Three ways financial services firms can do better on ESG

By Hannah Smith

Greenwashing in the financial sector risks devaluing ESG, but there are three things that could help firms raise the bar, says Nicola Stopps, founder and CEO of ESG-specialist management consultancy Simply Sustainable: upskilling, target-setting and better reporting.

Having worked with financial services clients including banks, private equity companies and funds, Stopps tells ESG Clarity Intelligence where she is seeing best practice, and where there is room for improvement.

“In the finance sector, the level of awareness, knowledge and then implementation [of ESG criteria] has risen quickly and dramatically but there is still a journey to continue. What I’ve seen work well is the understanding of the financial risk of ESG and particularly climate change on businesses,” she says.

The Taskforce on Climate-Related Financial Disclosures legislation coming in has been useful here, because this framework has helped improve knowledge of the risks of climate change and, by extension, other ESG topics too, adds Stopps.

Investment firms are “at the table on ESG”, asking the difficult questions of companies and setting the tone for the businesses in which they invest, forcing them to take ESG seriously. What else can financial services do to make their businesses, and those in which they invest, do better on ESG?

1. Upskilling  

The industry needs to upskill and increase knowledge and education on all ESG topics, argues Stopps. Right now, it’s fairly easy to recruit at a junior level and there is higher education on sustainability that just didn’t exist until quite recently, says Stopps.

At the mid-management level and above, things are more challenging.

“There is a really small talent pool of people with 20 years’ experience. I see senior leadership moving in to ESG without the skills and the knowledge. This is a really challenging area to work in, it’s not a quick fix to suggest a programme and implement it, it’s a long slog.

“And for that you need purpose and drive to believe businesses can be a benefit to society and the environment, and you can be a cog in the wheel to support that. That is sometimes missed at that senior level.”

2. More than box-ticking

Firms should have a “very robust, strategic approach to ESG and sustainable businesses” to prevent greenwashing. This should be aligned to commercial strategies, and there should be good understanding of the financial risk to the organisation if it doesn’t take such an approach.

Currently, a lot of firms are still treating ESG as a box-ticking exercise or a data set rather than something to be integrated more holistically into every aspect of the business.

Setting science-bound targets and KPIs and then implementing them strategically is key, as well as being honest and transparent about how decisions are made.

3. Better reporting

Stopps would like to see better reporting as companies prioritise ESG and integrate it into every business area. “How do you report transparently in a balanced, coherent, accessible and honest way?” she asks.

Standardisation of reporting standards should help here: the International Sustainability Standards Board is looking at bringing in a global baseline for sustainability-related disclosure requirements, and this makes Stopps feel both “hopeful and optimistic”.

“This is not something new, GRI [Global Reporting Standards] has been the gold standard in reporting for decades now, so there’s a lot of experience in that area already. I don’t think we’ll end up with one standard, I think we’ll end up with a couple just like with the financial reporting, there will be a few but it will be a lot simpler.”

This should make the concept of ESG more accessible to organisations, she suggests.

The time is now

Overall, Stopps’ message is that financial services firms must raise the bar on sustainability, and the time for action is now.

“We’re in 2022. Businesses need to actually start delivering. They need to meet climate change challenges and the stakeholder expectations on them. It’s not good enough now just to have targets and KPIs, they need to look at their business systematically and deliver sustainable transformation across their business,” says Stopps.

“This year and next will be the years of delivery.”