Financial institutions around the world are increasingly facing risks as a result of regulatory and reporting requirements that focus on the environmental, social, and governance (ESG) impacts of their operations.
There has been new legislation on ESG issues for the financial sector in 2021, including the Sustainable Finance Disclosure Regulation in the European Union and the Executive Order on Climate-Related Financial Risk in the US.
The ESG performance of companies and institutions in the financial sector is progressively influencing investment decision making, lending criteria, and insurance considerations. Clearly, companies unable to demonstrate an ESG strategy will be putting the long-term viability and resilience of their business at risk.
While there is no definitive list of ESG risks for financial institutions to consider, they typically include a blend of the following.
Criteria examining an organization’s impact on the planet, include:
For financial institutions, the transition to green financing is not only key to an organization’s reputation, but also emerging as a regulatory requirement globally.
Criteria examining how an organization treats and values its employees and surrounding communities, include:
These concerns are a few of many for financial institutions, along with the need to embed diversity and inclusion policies, social equality, and customer privacy.
Governance criteria assess a company’s corporate governance practices. These focus on board structure, in particular board diversity, audit quality and transparency, and issues surrounding remuneration, such as executive pay.
Financial institutions currently differ vastly in their readiness for the transition to sustainability, at which point organizational agility to respond to new laws, requirements, and customer expectations is going to be key.
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.
However, 42% of respondents said they have an ineffective process, or no process at all, for identifying, responding to, and implementing changes based on climate threats and ESG-related factors.
The survey also found 80% of financial companies had not yet carried out a comprehensive stress test on financial impacts from climate threats across current and future operations.
Organizations adopting a more proactive and methodical approach to understanding the impact ESG factors and climate change will have on their most valuable assets undoubtedly will be able to embed greater levels of resilience into their operations. As greater attention is given globally to ESG concerns, the need to act will continue to increase sharply.
Key actions to take include:
Acting on the above support the execution of ESG objectives in line with an organization’s risk appetite and bring practices within established environmental resource management and resilience frameworks.
If you have questions on your ESG and climate change risk, please contact your Marsh advisor.