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ESG is set to shape the future of finance

ESG is set to shape the future of finance

12 December 2023 | 9 min read

As Swift celebrates its 50th anniversary, we explore what changes the next 50 years might bring about when it comes to financial institutions’ relationship with Environmental, Social and Governance (ESG) issues.

When it comes to both people and the planet, a lot has changed over the last 50 years. When Swift was founded five decades ago, the term ESG hadn’t been invented yet.

But today, focus on the ever-growing climate concerns, economic volatility, financial inclusion, diversity, equality and inclusion have shot ESG conversations to the top of the agenda.

So, what will the primary concern be for financial institutions when it comes to ESG in the decades ahead? Is the industry prepared? And can we expect ongoing global collaboration when it comes to data, regulation and the commitment to net-zero?

Integrating ESG into the fabric of finance

If there’s one certainty when looking ahead at the future of ESG, it appears to be the inevitable integration of ESG criteria into the fabric of financial institutions. As governments, businesses and regulatory bodies around the world recognise the urgency of addressing sustainability and ethical concerns, ESG integration is set to become a necessity for financial institutions to future-proof their operations. Are we headed towards a new paradigm for financial institutions?

“ESG will be integrated in far less than 50 years,” says Joel Makower, Co-founder, GreenBiz Group. “It won’t even be spoken about anymore. Take ‘quality’ as an analogy. About 40 years ago, the work of Edwards Deming became ubiquitous. Every business, article, publication, conference, speech involved conversations about ‘quality’. At some point we heard a lot about quality – now we don’t.

“But quality hasn’t gone away. It is just part of the fabric of business. It is assumed. Just as soon, there will be an assumption that institutions are doing whatever they can to measure and manage ESG. I think in 50 years, we’ll look back at this era, and look at it the way we think about quality now – or safety. They’re just givens. ESG is on the same track.”

But, what might this integration look like – particularly when it comes to products and services? And what will be the impact on financial institutions seeking valid ESG credentials?

Dr. Stephanie Gripne, CEO, Impact Finance Center, foresees ratings and credentials as becoming integral to purchasing decisions, as a result of a revolution in data.

Dr. Stephanie Gripne
I would say that within ten years, we’ll have imperfect ESG data for every service or good we purchase. We are moving towards the democratisation of ESG.
Dr. Stephanie Gripne CEO, Impact Finance Center

“I think data (alongside qualitative assessments) will drive ESG ratings. I would say that within ten years, we’ll have imperfect ESG data for every service or good we purchase. We are moving toward the democratisation of ESG,” says Gripne.

“There’s a concept called ‘investment beliefs’. The idea is that we’ll be able to complete a survey related to ESG factors, and we’ll be able to say what is most important to us. Whether that is women getting access to healthcare, or living wage, or climate. You’ll rank each category, and it will generate a personalised ESG code. So next to products or purchases, you’ll have your own ESG scores – and you’ll know, for example, that this restaurant only meets 80% of your values.”

Melissa Sternberg, Global Head of ESG, Swift, adds, “I envision the ESG rating system to become similar to the way we have credit scores; they slightly differ but are relatively similar. They will be part of the overall integration of ESG into both the finance industry and society as a whole.

“I don’t think we’re ever going to have one global rating that everyone is going to trust and rely on. But I do think there will probably be a handful that are consistently used.”

The future holds a shift in the way ESG ratings are perceived and utilised. As this shift from quantity to quality occurs, ESG ratings are likely to play an ever more pivotal role in guiding investment decisions.

The changing regulatory landscape

From the United Nations’ Sustainable Development Goals to the 2015 Paris Agreement; the launch of the Glasgow Financial Alliance for Net Zero to the Task Force on Climate-Related Financial Disclosures (TCFD), and from the recent evolution of the Non-financial Reporting Directive (NFRD) to the Corporate Sustainability Reporting Directive (CSRD) impacting many more corporations to report on non-financial material topics, financial institutions are inundated by evolving voluntary frameworks and regulatory requirements, while also trying to collaborate to show progression on ESG. Around 81% of the world's 250 largest companies reported on ESG metrics over the last few years, up from 72% in 2013.

Navigating this changing regulatory landscape while handling accusations of greenwashing is expected to continue to be a challenge for institutions over the next 50 years. Can improvements in transparent financial reporting, and some degree of global standardisation around ESG measurements, help firms tackle the challenge? Over the next 50 years the industry will be tasked with balancing compliance and innovation.

“Typically we start seeing regulation happening when there’s some kind of emergency, whereby the industries themselves have not been able to figure out the solution quickly enough,” says Sternberg. “I think over the next ten years or so, we’re going to see a boom of regulations, and there’s going to be lots of fine tuning. I see this as the pilot stage.

“And while I don’t think there will be one set of global regulations, I definitely believe that over the next 50 years, there will be increased standardisation when it comes to ESG regulation around the world.”

Mackower adds: “Regulation is limited; it's really a floor. My definition of regulation is that, if something was any worse, it would be illegal. So the reality is that it ensures the bare minimum. But societal expectations? Customer expectations? They are looking well beyond that.

“We’ll always need regulations, we will always need to create a level playing field among all institutions. But I don’t think it's particularly aspirational.”

Along the path to net zero

The role of financial institutions in the global goal of net zero by 2050 should not be underestimated. Banks, investment firms and asset managers can have a direct influence on climate action through their investment decisions, funding allocations and divestment approaches. Looking forward to 2050, are financial institutions on track to keep their own commitment to net zero?

“I have to believe that financial institutions will meet the 2050 net zero target, otherwise we are in a dire situation. But I do think we need some more leadership,” says Helle Bank Jorgensen, CEO & Founder, Competent Boards. “When it comes to net zero, the challenge goes back to the lack of standardisation in reporting – and the subsequent lack of accountability that creates. We find people playing the game, rather than doing what they set out to do.”

Melissa Sternberg
A big investment in data will be absolutely critical. You can’t change what you can’t measure.
Melissa Sternberg Global Head of ESG, Swift

“Financial institutions absolutely do not have a choice but to meet the 2050 net zero target,” adds Sternberg. “ For organisations, it’s not just about the bottom line anymore. Stakeholders and shareholders increasingly expect a full accounting of the impact on natural resources, too.

“So a big investment in data will be absolutely critical. You can’t change what you can’t measure.”

The ‘S’ and ‘G’ in ESG

When it comes to ESG criteria, social and governance issues tend to be outshone by the attention placed on environmental issues. However, when it comes to the future of financial institutions in relation to ESG, these factors will become increasingly important. Diversity, Equity & Inclusion is one area which firms are likely to continue to embrace, as the competition for talent continues.

“Young people want to work in a place that is close to their own values,” says Bank Jorgensen. “Companies that are too slow will be left behind when it comes to capital they can attract, and their ability to retain top talent.”

“The net zero element of ESG, for example, is easy to conceptualise,” says Sternberg. “But I think organisations need to ensure they have strong governance and mechanisms, and a playbook for how they want to operate across people and the planet.”

ESG: an opportunity for financial institutions?

As of 2021, sustainable investing assets accounted for more than a third of all global assets, reaching approximately $35tn. There seems no doubt that while the environmental and ethical considerations pose significant risks to the future of financial institutions, there are immense opportunities for those that move fast.

“We really need to understand how to embed ESG demands. So it's not just a tick mark exercise, but actually an exercise to create value for both the financial institution, but also of course for companies and society at large,” says Bank Jorgensen. “There is immense opportunity here.

“Everyone is talking about transition. Who will dare to be the ones that go out on a limb, who decide not to lend based on ESG. This is starting to happen in a positive way, with ESG-linked loans and green bonds, etc. Frankly, you’re starting to get a better deal because you are committing yourself to ESG criteria.”

Makower adds: “Sustainability is a massive opportunity space for businesses of all types but primarily for financial institutions. I think over the next 50 years, certainly over the next 20, we're going to be seeing a huge opportunity for financial institutions to be funding this transition. Some institutions are now beginning to see the opportunity. But I think it's still very early days.”

Whether opportunity or challenge, it is clear that ESG factors are going to shape the future of financial institutions over the next 50 years. And while the climate crisis is likely to remain the primary ESG concern for financial institutions in the foreseeable future, it will increasingly impact social and governance issues too. A holistic approach will be needed.

The impact of climate change is not only a global crisis but also a significant financial risk. And as governments intensify efforts to combat the climate crisis, financial institutions will need to assess and manage the potential risks associated with their investments in carbon-intensive industries.

Beyond climate, social issues such as diversity and inclusion, income inequality, and ethical business practices will also remain focal points for financial institutions. The ability to navigate these multifaceted concerns while maintaining financial stability will be a defining factor for the industry's success.

The views expressed on these pages are those of the authors and/or the institution they represent, and not necessarily those of Swift.