ESG stands for environmental, social, and governance. ESG investing refers to the consideration of these three factors alongside financial factors in the investment decision-making process, according to MSCI. ESG has evolved over the years and has recently made headlines as consumers become more aware of the environmental and societal impact of their investments.
As early as the 1960s, the term “socially responsible investing” was introduced, with investors choosing not to invest in industries that supported policies or did business with countries that investors didn’t agree with, such as apartheid in South Africa. In the decades that followed, people continued to consider environmental and social issues in financial and governmental decision-making. In the 1980s, the idea of “sustainable development” emerged, which refers to the goal of meeting societal needs without compromising future generations’ ability to meet their needs. Then, in 1994, the United Nations Framework Convention on Climate Change was put to work to ensure governing bodies and corporations acted in the interest of human safety, even in the face of scientific uncertainty. In 1997, the UN implemented the Kyoto Protocol, which committed many industrialized countries and economies in transition to limit and reduce greenhouse gas emissions.
From 2015 on, ESG and sustainability efforts overall have become increasingly important to consumers and investors. As the importance of ESG has risen, so too has the difficulty in tracking and reporting on ESG efforts, leaving financial institutions in a challenging position.
With societal priorities shifting, businesses across industries are facing new consumer standards for environmental and social impacts—and trends show they’re responding. According to Goldman Sachs, in 2020, approximately $47 billion was funneled into investment strategies that take ESG features into account—almost double the amount of the previous five years combined. Nasdaq also found that ESG-integrated strategy assets under management were worth approximately $8.2 trillion as of the end of 2020, up 34% from the end of 2018.
This increased demand for effort around ESG issues brought challenges to financial institutions that they hadn’t dealt with before. ESG as a concept is clear, but guidelines on how to account for it are not. Expectations and regulations vary by region and international businesses are struggling to clearly define ESG compliance to stakeholders. On top of that, more ESG-friendly businesses means a greater need for custom investment products.
The concept of ESG is a global one, but there has yet to be a global standard for financial institutions to adhere to ESG regulations. However, Europe does have the Sustainable Finance Disclosure Regulation (SFDR), which went into effect in March 2021, and though the United States doesn’t yet have comprehensive regulations for ESG compliance, there are indications they are coming soon. Additionally, the Australian Council of Superannuation Investors (ACSI) and the Financial Services Council (FSC) published the ESG Reporting Guide For Australian Companies in 2015.
While many countries with global economies have adopted (or are set to adopt) some form of regulations, framework, or taxonomy to boost ESG compliance, there is no global standard for companies with an international presence, making it difficult to keep track of regional nuances.
ESG tracking and reporting have many moving parts and a growing array of issues, demands, and risks, which often occur across disparate departments, divisions, and data sources and pose a major challenge for leaders overseeing ESG. To minimize risk and expedite workflows, financial institutions should consider low-code to streamline ESG efforts and make reporting simple.
A low-code platform helps financial institutions from end to end, acquiring customers and managing ESG data for stakeholders throughout the ESG lifecycle in these ways:
To meet the demand of an increasingly ESG-conscious consumer base and ensure stakeholders are aware of their ESG efforts, financial institutions should look to automate manual processes with low-code. Low-code makes it easy to collect, review, assess, consolidate, prioritize, escalate, and report on the status of ESG compliance.
To learn more about low-code and how it helps financial institutions automate manual workflows to account for ESG factors, take a look at our eBook, Sparking Change: How Financial Groups Can Galvanize ESG Efforts.