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Finance & Investment
Beyond Data:
How Financial Firms Can Build a Sustainable Future

Disclosure and data certainly are important, but they are not sufficient to create a more equitable and sustainable world. Companies that take a narrow or compliance-focused approach to ESG are missing the forest for the trees.

To many in the investment community, 2021 will be remembered as the year institutional investors threw their weight behind environmental, social and governance (ESG) principles, recognizing the importance of these factors in driving long-term shareholder value. Investors backed a record number of proposals on climate change, diversity and other environmental and social issues during this year’s proxy voting season. A total of 34 resolutions won support from a majority of investors, compared to 21 a year earlier, and several passed with a thunderous 80 percent margin.

US companies have heard the message and have been responding to the growing demand for ESG information. Today, 90 percent of S&P 500 companies have published an ESG report, up from just 20 percent a decade ago. Companies are committing more resources to keep pace with the demand — not only from investors but ratings firms, standards-setters and independent advisers, as well. Furthermore, a recent paper by the Federal Reserve Bank of New York laying out a framework for climate stress tests seems likely to add momentum to climate risk reporting by banks.

Publishing an annual sustainability report can be a monumental task. One Chief Sustainability Officer (CSO) interviewed for a recent Deloitte study said their report required the help of 150 subject-matter specialists across the company. In addition, the CSO said they handled 55 inquiries last year from independent ESG assessment firms to either complete a survey or verify information, an experience shared by many US companies. In a recent US Chamber of Commerce survey, 73 percent of US companies reported a rise in the time and costs they incurred related to addressing ESG demands over the past five years.

Thanks to efforts by CSOs and their teams, today we have more metrics, more data and more reporting on ESG than ever before. But it’s fair to ask whether we are any closer to a sustainable future. Disclosure and data certainly are important, but they are not sufficient to create a more equitable and sustainable world. Companies that take a narrow or compliance-focused approach to ESG are missing the forest for the trees.

Instead of thinking of managing ESG in vertical silos (E, S or G), leaders should shift to a multidimensional view to examine the risks and opportunities present in all three areas and focus on three pillars: protecting the environment, promoting equity, and fostering trust and stability. They can then match these objectives across the broader jobs to be done — from redesigning work, reducing inequality and transforming education to improving health and wellness and developing alternative energy sources.

Financial institutions in particular have a key role to play given their vital place in the economy; and they should think strategically about how they can respond to ESG issues in a manner that creates profit for their shareholders and addresses urgent societal needs. In this way, financial services companies can strive for a “higher bottom line,” putting sustainability concerns on an equal footing with more traditional growth and profit goals, a position we described in a report earlier this year.

For example, addressing opportunities in next-gen mobility through electric and shared or autonomous vehicles can not only help address the issue of climate change, but also affect society more broadly by helping certain disadvantaged groups — such as those with mobility challenges or those who lack the financing to own their own vehicle, to experience greater opportunities to travel for work, shopping or pleasure. The financial services industry could help fund the technological solutions to address such challenges.

Similarly, financial leaders can use this same approach to position their firms to take a stronger stand on reducing inequality. Real estate property developers, owners, and financiers can think about developing low-income housing with sufficient public green space; bankers and wealth management firms can develop mobile-first products that bring more un- or underfinanced individuals into the system; and all types of organizations can take steps to ensure greater diversity in leadership, suppliers, and third-party relationships.

There is plenty of scope for financial services organizations to use technology and new partnerships to address major societal issues, make new markets and generate profit in collaboration with multiple stakeholder communities while proactively rebuilding trust in institutions.

Indeed, we’re already starting to see innovative examples in the financial services sector. In June, Citi announced new investments made by its $200 million Impact Fund. They included Greenwood — a Black-founded, tech-enabled, financial banking platform; and MoCaFi — a Black-owned fintech company that provides mobile banking, credit-building and wealth-empowerment tools to underserved communities.

The financial services industry is working hard to assess, measure and report on ESG goals. But the demands and expectations being placed on the industry – indeed on all industries – suggest that doing nothing is not a winning strategy. Neither is limiting efforts to measuring and reporting. The problems to be solve demand a more active posture, one that offers firms the opportunity both to share progress and to lead in the effort to create a more human-centric economy and society.