ESG 101 for Financial Services: Environmental, Social and Governance

by Joe Mendel – 

Environmental, Social, and Governance (ESG) as a focus will gain greater strides as technology-sustainable investing and for tracking and reporting to boards, stakeholders and regulatory agencies leverages intelligent systems.

Every day there is news about climate change and social justice issues that are bringing about a significant change in the ways companies conduct business.  Financial Service organizations themselves have pledged to reduce carbon emissions through a number of internal initiatives but it goes deeper than that.  FSI’s need to be aware of and report how they are supporting green issues and commerce by investing in or lending to companies that commit to ESG reforms.  But there are other financial advantages.  Statistics show that companies prioritizing environmental, social, governance (ESG) issues actually perform better in the long run across several financial metrics.  Boards need access to key metrics that track their company’s leadership, business practices, and overall governance on ESG issues as there are over 2,000 laws, regulations and policies governing currently on climate alone.  Maybe a blockchain solution to help automate the collection and reporting of ESG Data is warranted.

• BlackRock, one of the world’s largest asset managers, issued specific directives calling on firms to align with global efforts to reach net-zero greenhouse gas emissions by 2050. They have already recorded over $21Bn in new investment inflows in Q1 of 2021 and anticipates that to grow to over $1Tn by 2030
• Goldman Sachs has launched its first demand deposit account related to environmental, social and governance (ESG). The product, through Goldman Sachs’ transaction-banking (TxB) unit, connects the yield clients earn to the completion of ESG-related goals that clients set for themselves. Goldman in late 2019 committed to financing $750 billion in loans, underwriting, advisory services and investments for companies and projects focused on renewable energy, sustainable transportation, affordable education and other areas over 10 years.
• Bank of America, Citi and JPMorgan Chase each have pledged similar commitments in excess of $1 trillion.

To put more emphasis on the importance of ESG issues and Digital Assets, The Securities and Exchange Commission’s Division of Examinations announced its 2021 examination priorities¹ last March, including a greater focus on climate-related risks. The Division will also focus on conflicts of interest for brokers (Regulation Best Interest) and investment advisers (fiduciary duty), and attendant risks relating to FinTech, Innovation and Digital Assets in its initiatives and examinations.

The FCA (Financial Conduct Authority) in the UK just announced new ESG guidance strategies² for their member global organization that include imperatives around transparency, trust, tools, transition, and team.

Today’s consumers are much more likely to purchase from companies that are conscious of protecting the environment and are increasingly aware of financial organizations who are not committed to their own green initiatives or are investing in or financially supporting the “sin industries” of fossil fuels, alcohol, tobacco, etc.).  Banks should be able in real-time answer any question regarding their stance and commitment and also apprise the board, stakeholders and regulators of progress being made to advance the ESG goals.

Works Cited

1. U.S. Securities and Exchange Commission (2021, Mar 3) "SEC Division of Examinations Announces 2021 Examination Priorities" Retrieved from https://www.sec.gov/news/press-release/2021-39

2. The Fin Tech Times (2021, Nov 6) "The FCA’s New ESG Strategy Supports Transition to a Sustainable Economy Through Five Key Themes" Retrieved from https://thefintechtimes.com/the-fcas-new-esg-strategy-supports-transition-to-a-sustainable-economy-through-five-key-themes