A recent survey from Broadridge Financial Solutions found nearly two-thirds of financial services firms are in the early stages of their ESG journeys. As firms start to implement ESG strategies, they will do so in an environment where the topic of ESG has permeated nearly every facet of the evolving financial services landscape. From regulatory developments, changes in investment priorities, evolving retail and institutional expectations, firms have a lot to contend with. So how should financial services firms, or any firms for that matter, think about their approach to ESG? Below are some suggestions.
ESG IS ABOUT VALUE, NOT JUST VALUES
As a starting point, it is helpful to remember that ESG is about value, not just values. Firms should avoid thinking about ESG simply in terms of it being something that they do to be good corporate citizens. ESG is about the environmental, social and governance factors that influence long-term success. Good ESG programs start with senior-level discussions regarding how ESG fits into the business strategy. It also requires buy-in from the board of directors, who ultimately should understand and have the opportunity to provide feedback regarding that strategy.
FOCUS ON MATERIALITY
The most fundamental step in developing an ESG strategy is doing a materiality analysis, an assessment process intended to identify the most important ESG factors affecting a firm’s business. Standard materiality assessments begin with the identification of a firm’s key stakeholders, including employees, customers, vendors, investors, regulators and other constituencies. Next, firms should generate a list of ESG risks and opportunities derived from a firm’s risk assessments, board materials, leadership meetings, customer feedback and employee surveys. With this list in hand, firms should ask stakeholders to rank the risks and opportunities based on how the risks and opportunities impact the firm’s current and future performance. The goal is to whittle the list down to the top risks and opportunities around which a firm should focus its ESG strategy, reporting and engagement. In the absence of this kind of exercise, firms end up running down rabbit holes to address ESG issues that may not in fact be particularly relevant for their business.
CHOOSING A FRAMEWORK
To ensure that an ESG strategy stays aligned with materiality, choose the right reporting framework. Companies today are presented with an alphabet soup of reporting and rankings frameworks. Not all those frameworks will be the best fit for an industry or company. Two of the most common standards are the Taskforce for Climate-Related Financial Disclosures and Sustainability Accounting Standards Board, or SASB. For firms just starting in the process, SASB is usually a good place to start because it is industry-based, meaning that it presents a unique set of standards for each main industry category. A big strength of the SASB framework is it’s specifically designed to provide investors with the information they require to assess companies and make decisions.
Firms should engage with investors regarding the ESG factors that are most relevant to them, and update their ESG strategies and priorities based on that engagement. In my experience, one-on-one engagements or ESG roadshows with investors can be incredibly illuminating, helping a firm focus its efforts on what’s most important. This feedback regarding whether their ESG disclosures are accomplishing their objectives is critical. It can also give firms the opportunity to focus investors on critical disclosures that they might otherwise miss. This, in my mind, is the virtue of an active ESG engagement program.
THE HORIZON IS BRIGHT
The Securities and Exchange Commission is expected to mandate ESG disclosures this year, while regulators in Europe are developing what could be a global framework for ESG disclosure standards, ratings and financial products. While it will be years before these efforts are complete, firms shouldn’t wait to refine their ESG strategies. Firms in the early stages of building their ESG programs can start by getting alignment from their senior leaders, conducting a materiality assessment, picking the right reporting framework and engaging with their investors. With that foundation in place, firms should be well positioned to execute an ESG strategy.
Keir Gumbs is chief legal officer at Broadridge Financial Solutions.
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Andrew is half-human, half-gamer. He’s also a science fiction author writing for BleeBot.