What’s driving financial firms’ sustainability strategies?

Thu 08 Feb 2024

To adapt to the swiftly evolving regulatory landscape and meet stakeholders’ expectations, financial firms are increasingly formulating sustainability strategies to address environmental, social and governance (ESG) factors. 

Notably, emissions reduction and the pursuit of net-zero targets have become central elements of ESG strategies for many financial firms, according to the latest Mazars’ survey Sustainability practices stocktake: How banks and insurers have progressed. 

Yet, with sustainability strategies needing to take account of a growing and diverse range of ESG factors, what are the key factors now driving sustainability strategies forward? 

Consumer demand, regulatory initiatives and maturing methodologies provide a push

In terms of trends driving the agenda, there is growing consumer demand for products and services that are carbon neutral or contribute to the transition, reflecting a heightened awareness and concern about climate change among the public. Financial firms are responding by shifting strategies to incorporate more sustainable products and services.

From a regulatory perspective, the introduction of net-zero goals and emissions reduction targets by international bodies and domestic regulators have compelled financial institutions to align with these objectives as part of their regulatory compliance efforts. This has been helped by the presence of established and globally recognised methodologies for greenhouse gas (GHG) reductions, which provide a framework for financial firms to structure their sustainability initiatives and reporting. 

The rapid adoption and growth of net-zero target-setting methodologies such as the Science Based Targets initiative (SBTi) have also significantly streamlined and made the process of setting emissions reduction targets for financial services firms achievable. In addition, the Glasgow Financial Alliance for Net Zero (GFANZ) has played a pivotal role in addressing the challenge of understanding, calculating and reporting financed emissions.

Primary priorities and metrics

Primary priorities concerning sustainability strategies must now go beyond emissions reduction targets to consider a broader range of ESG factors. According to the survey, emphasis on the importance of sustainability strategies in promoting biodiversity and the natural environment is now a priority for banks. In contrast, insurance firms prioritise diversity and inclusion within their sustainability strategies.

Regarding strategies to monitor sustainability performance metrics, most financial firms display a comprehensive approach across short-, medium-, and long-term time horizons. However, the scope is more limited when monitoring metrics and targets across different business lines and geographic regions. This indicates that financial firms still face considerable challenges in adapting sustainability strategies to reflect the entire value chain. 

Contrasting strategic approaches

The evolving landscape of ESG integration within the financial services sector highlights contrasts in how organisations approach sustainability matters in their strategic planning processes. 

From a regional perspective, sustainability-related matters play a significant role in designing and deciding new services and products in Asia Pacific and Europe. In Latin America, ESG factors are particularly influential when reviewing business plans, whereas in Africa and the Middle East, the ESG emphasis is placed on investment in research and development (R&D). In North America, ESG factors are notably incorporated into people-strategy decisions.

When forming a strategy for sustainable products and services, the organisation’s size is a factor, with larger organisations allocating more resources to invest in R&D and developing new products and services. For instance, green or sustainable bonds, renewable energy investments and carbon market-related products often demand a significant financial commitment to initiate. Given their greater access to capital, larger banks find it more feasible to explore and pursue opportunities to expand their ESG and sustainable offerings.

However, it is essential to note that smaller firms can still strategise sustainable opportunities by targeting R&D and tailoring service offerings to align with their capabilities and relevant market segments. Smaller firms have the advantage of being more agile and responsive to market trends, which can be leveraged to identify niche sustainability opportunities that are financially rewarding. 

The road ahead

A climate strategy can be more challenging for financial services firms compared to other industries due to the lack of direct emissions in their operations. However, as the ESG landscape continues to evolve, firms are beginning to expand the scope of their sustainability strategies to encompass areas such as biodiversity and social causes. 

The threat of future regulatory developments, growing stakeholder interest, and increasing consumer demand for ethical and sustainable practices are pushing financial institutions to focus more on sustainability considerations in their strategic activities. 

In the future, we will likely see strategies reflect the evolving landscape of sustainability in the financial industry and the growing recognition of the interconnectedness of various sustainability issues.