Many of the world’s leading companies have ESG policies embedded within their operations. Some, like Unilever, place their credentials at the forefront of their corporate identity; others may not see themselves as formal pioneers of ESG, but still embrace its principles.
Recent research conducted by Board Agenda and Mazars found that 73% of boards say that ignoring sustainability issues would affect their ability to create long-term value. However, there is concern that many boards still grapple with how to integrate sustainability into company policies.
Companies with a strong market position, financial strength and the strategic vision to deliver growth over the long term are rarely those that shun sustainable or ethical practices. What is sustainable is often just good for business. Likewise, a board that sees ESG as a box-ticking exercise, or fad, is probably hiding the symptoms of a deeper malaise.
“Financial services organisations are buffeted by market-moving events but it is the job of the board to ensure long-term and sustainable returns for all of its stakeholders, as well as a recognition of and adherence to ESG criteria,” says Mazars’ Anthony Carey.
Good governance is essential for an organisation’s long-term survival. For many financial services companies, the 2008 crisis demonstrated that the business models they pursued—an obsession with short-term, top-line growth—were unsustainable, and destroyed shareholder value.
Beyond that, massive taxpayer bailouts triggered a global economic recession, fuelled inequality and destroyed trust with society at large.
When they report results, some financial services firms now include ESG criteria to show how they are measuring up in addition to revenue and return on capital. They pursue policies of engagement in society with significant initiatives to promote ethical responsibility, social and environmental innovation and a low-carbon economy.
They publish detailed ESG reports on their websites, but boards should ensure their commitment goes beyond words. Stakeholders will then respond more positively too.
“Boards should have a governance framework that analyses all risks—not just those directly linked to the business, but also those impacting their employees and the community at large as these will lead to reputational risk and adverse financial consequences,” says Carey. “To be taken seriously they should have more balanced reporting. Flagging up areas of improvement as well as trumpeting success is important.”
Robust ESG procedures
But as interconnected firms with tentacles that reach across the globe, financial services firms must be constantly watchful. They may think they are embracing ESG, but they need to be proactive. Asset managers must ensure they have a robust ESG procedure to engage with the management teams of the companies they invest in, and communicate that effectively with their own boards.
Meanwhile, strong board oversight is necessary to ensure banks are aware of the sustainability of each link in their supply chains. A number of scandals at big banks have revealed serious breaches of anti-money laundering rules, which have resulted in heavy fines and the implementation of global Know Your Customer programmes.
Fundamentally, some market participants must find a way to re-engage with a broader set of stakeholders, while others have realised that a decade on from the financial crisis, their reputations may be beyond repair. In October, the Royal Bank of Scotland, which was bailed out by the UK government at huge cost to taxpayers, launched a rebranding initiative because it had concluded its brand was too toxic.
But institutions need more than rebranding to be sustainable. According to the Latin scholar Publilius Syrus, “a good reputation is more valuable than money.” Syrus lived between 85 and 43 BC, but his words seem more relevant today than ever before. The rise of social media means that reputations are harder to establish and can be destroyed in an instant. Technology enables consumers, NGOs and employees to form rapid allegiances that can make—or break—a brand. Feedback is instant.
But rather than simply looking to protect a reputation or adopt ESG after the fact, boards can set the tone and ensure strict oversight to secure long-term success. Effective boards have a crucial role to play in aligning incentives with long-term performance and keeping a tight rein on behaviours that could undermine sustainable practices.
Boards must also ensure that cultural change programmes deliver what they promise, rather than paying lip service to ESG.
Financial services companies have come to realise that they have a broader role to play in society. Employee behaviour is changing along with demographics, with staff demanding more flexibility in their jobs and continuous learning.
The scars of the banking crisis have meant the industry has lost some of its lustre. A survey of Oxford University graduates found that 10% were now less likely to consider a career in banking. At the same time, fintech and the broader technology sector is attracting more talent.
Boards must figure out a way of having the right talent management systems in place that are aligned with their culture. It is not enough to say they are sustainable employers; they must demonstrate it, or their share price will suffer. Successful integration and effective management of sustainability requires a robust governance structure.
This article is an excerpt from the Special Report – Future-Proofing Financial Services . You can read the full report here