Business
Innovation in ESG: The Next Big Thing in Financial Services
Amid global economic turmoil and increasingly serious concerns about the climate, executives in the financial services industry must face the music of how their approach to ESG affects business.
Research reveals that 68% of Canadian public companies link ESG to executive pay — and many other developed countries are following suit. As a result, ESG has become a key agenda item with a direct impact on business objectives, executive bonuses, and more.
ESG is a broad framework and is subject to varying levels of regulation across the world. According to Bloomberg Intelligence, global ESG assets may surpass $50 trillion (USD) by 2025, representing an incredible one-third of all assets under management globally.
In this article, we take a deep dive into ESG, including how its definition and regulation vary around the world. Plus, we discuss key considerations such as how ESG affects technology development and the importance of green technology for financial services.
Keep reading as we cover the key factors for financial service firms and other businesses to keep in mind as we move further into 2023.
What is ESG?
ESG is an acronym for Environment, Social, and Governance.
As you may have guessed, ESG is used to measure and score how a business stacks up in terms of its approach to environmental sustainability, social awareness, and internal governance.
Let’s break each of these factors down further:
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Environmental:
This represents a company’s environmental commitment, such as measuring its carbon footprint and striving to reduce emissions. It can also include factors such as energy usage, production and management of waste, and overall environmental responsibility.
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Social:
Social commitment has become a more prevalent issue among stakeholders and customers alike, resulting in an increased demand for responsible and fair workplaces. Factors to consider here include diversity, employee satisfaction, and overall workplace culture (especially in regard to workplace safety and employee health).
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Governance:
Governance refers to how a business internally governs itself to maintain equity and equality. This can include more technical tasks, like compliance, as well as a closer examination of a company’s ethos and leadership. Governance also takes a look at factors such as pay ratios and corporate culture.
An Overview of Global ESG Regulation
Around the globe, ESG regulation is highly varied.
For instance, the U.S. federal government does not impose any mandatory ESG disclosures as of January 2023, according to the International Comparative Legal Guides (ICLG). However, the U.S. Securities and Exchange Commission (SEC) does require public companies to disclose ESG-related risks to investors.
Meanwhile, in Europe, ESG regulation is much further along than in the U.S.
The European Union (EU) recently revealed its Corporate Sustainability Reporting Directive which, among other things, requires roughly 50,000 companies to report on ESG, with special emphasis on the environmental and social categories. Both large companies and small-to-medium-size enterprises (SMEs) are subject to these new reporting requirements.
Africa is similarly advanced in its ESG approach, with 40% of Africa’s assets under management considered sustainable investments.
While the EU still pulls ahead, Africa outperforms North America in terms of ESG share. Furthermore, Latin America is working to improve its approach to ESG with 35% sustainable investments, while Asia (less than 25%) and the Middle East (less than 10%) both have catching up to do.
How Does ESG Affect Technology Development?
Discussing ESG highlights the need for an improved approach to each of the three ESG scoring factors (environmental, social, governance) — but what does it mean in practice?
Companies that adopt a thorough approach to ESG are likely to see significant impacts on technology development. These impacts can be both positive and negative, depending on how well a company adapts to developing and utilizing sustainable technologies.
For example, ESG presents an opportunity to develop new products that enable companies to sell carbon savings to others via a trading platform. This can boost the presence of good incentives, driving more companies to embrace an ESG-conscious approach.
However, punishing poor-performing companies requires empirical measurement — something that is more difficult to achieve without consistent regulation. Moreover, these measurements must also fall within the guidelines of ESG by utilizing green technologies to carry out performance assessments.
For the financial services industry, unifying ESG and technology development is crucial.
The financial services industry has undergone a tremendous digital evolution over the past few years, leading technology to play a greater role within the industry. As a result, regulators and investors alike are paying closer attention to how this financial technology measures up against relevant ESG expectations.
With this in mind, let’s now discuss the role of green technology, including what it is and why it matters.
Green Technology in ESG: What it is & Why it Matters
Green technology (or green tech for short) refers to technology that is specifically designed to reduce both human and technological impacts on the environment.
Determining whether or not a technology falls under the green tech umbrella depends on several factors, including production processes and supply chain sustainability.
The main purpose of green tech is not just to meet ESG standards but to establish better technological systems that can improve operational efficiency while also reducing energy consumption, waste, or other negative environmental impacts.
In the financial services industry, companies have a unique opportunity to act as leaders in the ESG space. According to a recent Deloitte report:
Yet, despite the industry’s opportunity to act as an ESG leader, the industry also faces complex issues with certain technologies that could hinder ESG efforts — in particular, blockchain technology.
Concerns Regarding the Impact of Blockchain on the Environment
Blockchain technology is not inherently good or bad for the environment. It ultimately comes down to how this technology is utilized and the overall awareness of the potential environmental impacts.
In fact, with the right approach to blockchain development, blockchain could even prove to be beneficial for ESG initiatives. As PwC states:
While the potential ESG advantages of blockchain should not be ignored, neither should the existing harm blockchain has inadvertently caused. For instance, cryptocurrency mining employs immense amounts of electricity, mostly in the form of fossil fuels, causing substantial pollution and emissions.
Improving the overall ESG score of blockchain technology comes down to adopting cleaner energy alternatives and developing better algorithms that address the needs of ESG initiatives.
To better illustrate this, imagine a blockchain smart contract designed to automatically react to changes in the supply chain. Blockchain developers could build this type of smart contract to track the sourcing of raw materials, ensuring all materials are sourced from ethical and sustainable suppliers.
The bulk of crypto mining occurs in the U.S. — a country with some of the most relaxed ESG requirements among major economies. As such, the role of blockchain in ESG may ultimately come down to what kinds of ESG and crypto regulation within the U.S. come to fruition in the coming years.
The Benefits of a Strong Approach to ESG
An ESG initiative can impact more than just a company’s overall sustainability.
Key benefits of a strong approach to ESG include:
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Boosted Employee Retention:
The social and governance aspects of ESG take a long, hard look at the satisfaction of employees. This includes everything from workplace culture and equality to compensation and diversity. By adopting a strong ESG approach, financial services firms can provide vastly enhanced workplace experiences to employees, boosting overall employee retention and building a stronger and long-lasting business team.
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Improved Biodiversity:
Wildlife is admittedly not one of the top priorities among financial service companies — but perhaps it could be. Improving biodiversity is a critically important component of ESG, especially when it comes to combatting climate change. For example, companies could develop biodiversity risk assessment tools that identify the proximity of wildlife and natural habitats to harmful energy sources.
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New Remote Work Opportunities:
With ESG at the top of company leaders’ minds, remote work may present new opportunities to boost ESG ratings. Enabling remote work for employees can not only enhance employee satisfaction but also help to reduce a company’s overall environmental impact, such as producing fewer emissions from employee commutes. However, companies must ensure that work-from-home employees have the resources and support necessary to cut back on energy usage and overall waste for this to be truly effective.
Implement ESG Practically with Exadel
At Exadel, our team is committed to incorporating ESG into our entire operational framework.
We not only strive to ensure that our services meet ESG standards but also that our clients have the resources and support to do so as well. Additionally, our Employee Resource Group (ERG) network ensures that the entire Exadel community is connected and able to collaborate and share experiences.
Our approach to ESG can be divided into three main commitments:
- Commitment to diversity, equality, and inclusion
- Commitment to sustainability
- Commitment to charitable giving.
Regardless of which regional ESG regulation your company faces, the time is now to establish a strong ESG approach that supports both your internal team and external community.
Talk to the Exadel team today to learn how we can help you practically implement ESG.