How financial services can use ESG initiatives to help build a brighter future for all

ESG: A call to action

Without a doubt, 2020 ushered in a heightened focus on environmental, social, and governance issues. Momentum had been slowly building in support of corporate social responsibility, with the Business Roundtable declaration on the issue in 2019 being a major development. But with the pandemic and associated economic dislocation, heightened social unrest, and continued climate change, the need for action on environmental, social, and governance (ESG) topics by governments and corporations alike has never been higher.

Financial services firms are starting to measure and disclose their efforts at supporting all stakeholders, providing a solid foundation for building a broader perspective. They’re focused on answering two questions: What are the essential jobs that need to be done within an ESG framework, and what tools does the financial services industry possess to get those jobs done?

ESG approaches for financial services

There’s no shortage of approaches that governments and others are taking to meet environmental, social, and economic challenges. The Biden administration has taken steps with a combination of executive orders, proposed rules, and commentary on climate risks, diversity and inclusion, community reinvestment, ethical uses of artificial intelligence, and a heightened focus on regulatory enforcement. Similarly, both the European Commission and the United Nations have released goals and objectives related to ESG, and they’ve been joined by other public and private organizations.

These new frameworks have helped define a complex array of issues. For an industry built upon counting and reporting, these frameworks feel very comfortable. And despite varying levels of depth and industry focus, it’s clear what these frameworks share:

• Protecting the environment
• Promoting equity
• Fostering trust and stability

Financial services executives should move beyond the current view of ESG and think strategically about how their companies can respond. Today, the industry has an opportunity to leverage innovative technology and explore new partnerships to address major societal issues, make new markets, and generate profit in collaboration with multiple stakeholder communities while proactively rebuilding trust in institutions.

New opportunities for the financial services industry

The essential opportunity for financial services firms is in catalyzing and accelerating the transition to a new economy, one based on ecosystems that satisfy fundamental human needs and wants while also tackling urgent societal challenges that demand new solutions.

Traditional economic structures are giving way to a consumer-led economy where capabilities are organized around core human needs and wants. Unlike the traditional industry value chain, where the customer sits at the end of a line of B2B relationships, these new arrangements place customers in the center. The overlapping value webs surrounding them will deliver on human needs more directly and powerfully than ever before.

Societal challenges consistently change and create new threats. These issues also offer tremendous opportunities for the financial services industry to play an impactful (and profitable) role.

Navigating potential future shocks

The road ahead will not be a smooth one, and the financial services industry will need to prepare for inevitable shocks that arise over the next 10 years. Some of the most credible and impactful challenges include climate adaptation, additive manufacturing, the changing role of work, and reducing inequality. These shocks aren’t mutually exclusive, however; many of them may emerge over the coming decade, and the materialization of one may spur the development of others. This makes it even more urgent for industry leaders to prepare for all of them.

Taken together, these opportunities and shocks present a daunting list. From an ESG perspective, none of them should be considered in isolation from each other. Instead of thinking of managing ESG in vertical silos (E, S, or G), leaders should shift to a multidimensional view to examine the risks and opportunities present in all three areas and across the broader jobs to be done.

What are the tools needed to do the job?

Recognizing that the jobs to be done around protecting the environment, increasing equity, and ensuring stability are complex, what are the tools that financial services firms can bring to bear? Addressing the opportunities around transforming education, or managing the shock of another biothreat, requires a well-equipped tool belt.

In a recent publication on the future of financial services, we argued that the industry plays five fundamental roles. They are:

• Facilitating value exchange and liquidity
• Providing a means for the secure storage of wealth
• Offering mechanisms for risk management
• Facilitating investment across multiple parties
• Maintaining trust and confidence to drive economic growth

These roles continue to evolve. So how should financial service industry leaders think about the actions they should take? The answer to that question is that leaders should think horizontally about ESG, not vertically. This cross-pillar view of opportunities is also useful in assessing potential risks.

Leading the way toward sustainability

The financial services industry is off to a good start, with work now underway to assess, measure, and report on ESG goals. But financial services can’t do it alone. For society to address any of these future challenges, industry participants must not only perform amplified roles, but also act as leaders, collaborating with policymakers, civil society organizations, tech companies, logistics providers, manufacturers, and various other public and private actors across the economy. By combining their strengths, these actors can, together, usher in a brighter future.