The financial services industry has, like other industries, embraced many aspects of sustainability. It’s a buzzword in the finance industry – but there is far more to it than that.
Why shine the spotlight on sustainability in financial services?
There is an increasing amount of pressure on financial services and banks to become sustainable, or to have policies in place that are sustainable operationally. Likewise, those acting on behalf of investors have a delicate balance between achieving returns and investing in sustainable and ethical initiatives. Then there are the regulatory and reporting requirements.
This research by iResearch Services looks at the current state of sustainability in financial services, lifting the lid on whether the industry is behind genuinely sustainable practices, or whether firms view it as a short-term agenda to jump on for positive exposure.
We ask the key questions:
- Are we in it for the long haul, or just “greenwashing”?
- Are there other, more pressing priorities, or is this Number One on the agenda? Should it be?
- While responsibility lies with us all, who should be doing more to create a more sustainable financial services ecosystem? Organizations themselves, policymakers, governments…?
The survey spoke to 550 senior decision makers in financial services across Europe, Australasia, China, Japan, the USA, UK, Russia, and India. We find out direct from financial services across the globe what obstacles and challenges remain to becoming sustainable, and what financial services companies are doing to build a more sustainable future for all.
How sustainable is financial services?
The good news is that the financial services industry is making significant headway when it comes to sustainability.
“In our survey of 550 global financial services professionals, just over a third (37%) believe enough is being done, only 18% believe not enough is being done.”
Sustainability is far from a fad: only 27% of the financial services professionals we surveyed feel sustainability is a future-proofing exercise, meaning that the majority feel that now is the time to gain sustainable benefits.
The industry is making huge headway in its products too: 63% of those surveyed said their products are green friendly; and 64% told us their upcoming products have been designed to be socially, environmentally, and economically friendly.
Our survey also showed that most financial services firms are putting in excess of £500,000 budget each year into sustainability initiatives, with 15% putting in over £2 million.
Despite this commitment there are many challenges ahead.
‘Greenwashing’ is not an issue unique to financial services, but as the finance industry is subject to constant regulation, it is of particular concern to many companies.
It also has the potential to harm an industry that has only just emerged from a series of damaging scandals; scandals which were not endemic to financial services but did manage to influence consumer perception.
The Financial Conduct Authority (FCA), the UK regulator that covers the asset management sector, among others, has greenwashing in its sights. “[Greenwashing is] marketing that portrays an organisation's products, activities or policies as producing positive environmental outcomes when this is not the case”.
“More than half of financial services businesses that we surveyed believe their competitors were guilty of greenwashing.”
More than half of the 550 financial services professionals iResearch Services surveyed believe at least some competitors were deliberately greenwashing to mislead customers about their ethical practices.
Just how possible is it to eradicate greenwashing?
In March 2020, the European Union’s Sustainable Finance Disclosure Regulation came into effect to ensure firms are comprehensively disclosing how committed to sustainability they really are.
The U.S. is also moving fast towards introducing regulation to make sustainability practices more transparent.
The EU’s regulation, which came into force on March 10, 2021, was seen as a significant step to tackle the issue of ESG reporting and transparency. It is likely to have a knock-on effect on other regulatory regimes as it applies not only to the EU but also to those outside Europe that market their products to EU investors.
2. The cost of sustainability
Implementing sustainable strategies involves a long-term cost. That cost remains one of the biggest reasons for preventing financial service companies from adopting them.
“In our global survey, 45% of financial services professionals say cost is the biggest barrier to adopting more sustainable strategies.”
A report by KPMG highlighted this dilemma, noting that a switch to sustainability is not just about ‘flicking a switch’ and that there were many costs involved.
Steven J Hall, partner, financial risk management, at KPMG said: “They still have significant books of business wrapped up in loans and instruments to ‘brown’ assets.
“As long as those brown assets continue to generate profits for the bank, bank executives will need to balance their duty to finance the ESG transition against their fiduciary duties to shareholders.”
“Banks, regulators and politicians are also struggling to understand all of the potential unintended consequences of their shift towards more ESG-related business strategies.
“Declining to renew loans on existing coal mines, for example, may improve a banks’ carbon disclosures.
“But it could lead to significant social implications as mines close and unemployment grows (which, in turn, would have a massive impact on that market’s retail lending and potential impairments).”
Other costs cited by financial services professionals in our global survey are managing the short-term impact of Covid-19, 36%, and a lack of resources cited by 36%.
3. Becoming sustainable
Becoming sustainable means pursuing a long-term strategy that allows a business to make a positive impact on:
- the environment;
- employee behaviour and health; and
- the well-being of consumers or clients who use its products.
A sustainable strategy will involve the pursuit of goals including (but not necessarily exclusively) cutting emissions and preventing pollution.
Having a formal or informal net zero agreement or plan in place is a good indication of how sustainable a business is or intends to be.
“Almost a third (30%) of those surveyed say that their business already has a formal net zero agreement, while 22% are in the process of bringing one into their organisation.”
4. What is the value of being sustainable?
In addition to saving the planet and attracting new customers with social responsibility, sustainability can drive business, but its value is being questioned by some financial services companies.
“Almost one in five (18%) of financial professions surveyed said they have held off due to a lack of value in becoming sustainable. This is a surprising number, given the current drive for sustainability and appetite from consumers and investors.”
According to McKinsey , brands with higher ESG ratings (environmental, social and governance metrics) were more financially successful and have more public support.
Indeed, in our survey, 49% of financial services professionals believe that by becoming sustainable they will gain new customers.
“In our survey, one of the biggest drivers of sustainability is the ability of the company to align its sustainable initiatives to its vision and values; only 5% of the 550 financial professionals suggest that they are doing it for commercial growth and only one in ten said they are doing it to keep up with competitors.”
Employees and sustainability
Companies that embrace sustainable practices attract better employees and in our survey 35% believe it would make their organisation more attractive as an employer.
The survey also revealed 77% of financial services professionals believe their business is a responsible employer and 73% said their business considered ethical issues when working with potential customers.
“Being sustainable is about more than just gaining a competitive edge, it gains better employees and possibly enhanced strategic partnerships; in our survey 89% believe it is imperative their firm is viewed as sustainable by customers and partners.”
Many firms are collaborating with other providers to become sustainable, with 60% suggesting they are using several partners, and 28% only using one partner to bring in sustainable initiatives.
Another hidden value of sustainability is that employees will work harder for a business they believe is operating sustainably.
Of those surveyed, 48% suggest that their employees would work harder for a sustainable employer.
5. Sustainability in financial services - could do better
In our survey, 48% believe that their business is sustainable, and only 5% believe their organisation is not sustainable enough.
“More than half (57%) of financial service professionals believe significant change needs to be led by governments.”
Just over 40% of financial professionals believe policymakers need to get more involved in and do a better job of supporting the implementation of sustainability initiatives.
Initiatives such as the UNFCCC Race to Zero campaign, may be laudable, but governments need to do more to help companies from the ground up.
6. Sustainability: The global divide
There is a notable sustainability gap between the East and West in our survey findings.
Chinese businesses leading the way?
Chinese financial services businesses are ahead of the game when it comes to committing to a reduction in Greenhouse Gas Emissions. Of the Chinese financial services professions surveyed, 58% work for a company with a formal net zero commitment.
China, which contributes more than a quarter of the world’s total carbon emissions, strives to be carbon neutral by 2060.
This pledge is sifting through to its businesses in stark contrast to the US, where only 28% have pledged a net zero commitment.
The divide is even more apparent when we look at Russia, where only 8% of firms said they had a formal net zero commitment.
The commitment by Chinese firms is only solidified as 100% of financial services professionals surveyed in China believe that being viewed as sustainable by customers is crucial to their success.
However, lack of a formal commitment does not mean the intention is lacking; 28% of Russian respondents have an unwritten commitment to becoming net zero, matching the views of 28% of Chinese respondents.
Nearly all Chinese respondents, an impressive 88%, believe their business considers ethical issues when partnering or working with specific companies and 64% said sustainability is a “vital part of our vision and values”.
This is only strengthened by the investment made in sustainability and 40% of Chinese respondents said their business had invested over £2 million into becoming sustainable, in comparison with second place Germany, with 24% saying their firm had invested over £2 million in sustainability strategies.
Sustainability isn’t a choice
Globally, sustainability has caught on in a big way. Financial services companies may not be leading the charge, but they are more than bringing up the rear.
Global initiatives such as the UN’s Zero Carbon campaign can only go so far, and while customers are driving change, regulation will need to evolve. Governments, too, will have to offer more support. While China appears to be leading the way, there is no doubt support from its government has made this possible.
The industry has adopted the mantra People, Planet, Profit, but it will continue to take considerable work and diligence before sustainability is no longer a buzzword, but a way of life.
Do any of these trends jump out?
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