Sector Report

Financial Services

Sustainable Investing
Comes of Age

The financial services sector is finally taking ESG seriously and not looking back.

Increasing awareness of environmental, social and governance (ESG) issues, combined with the finance sector’s growing understanding of the impact of ESG on corporate performance, is driving banks, asset managers and investors to integrate sustainability data into decision making at unprecedented levels.

ESG data has matured to the point where it has been embraced by the finance sector as a key way to identify the companies positioned to succeed, and those that may underperform or fail. A majority of ESG indexes outperformed their non-ESG counterparts in 2018. Sustainable, responsible and impact investing assets under management also rose to $12 trillion in the US in 2018, up 38 percent from $8.7 trillion in 2016. In 2019, increasing collaboration across the finance sector will continue driving action on topics like inclusive capitalism, climate change, gun violence and diversity.

“CEOs will see in the tone of our questions that we are geared towards long-term performance – both from a shareholder perspective, but also from the perspectives of their stakeholder needs and their organisational resilience.”
Matt Christensen, Global Head of Responsible Investment at AXA IM

Signals to Watch

New tools, metrics, coalitions

From increased investment in Sustainable Development Goal-aligned initiatives, to new alliances and coalitions, financial services companies are waking up to the opportunities presented by a more sustainable economy. This year will likely see greater scrutiny regarding impact measurement of ESG and SDG focused finance products.

  • High-Level Expert Group on Sustainable Finance established by the EU has published its recommendations for a financial system that supports sustainable investments. Based on these recommendations, the Commission is now finalizing a multi-year strategy on sustainable finance in the EU.

  • The Embankment Project for Inclusive Capitalism has brought together CEOs from over 30 companies, asset managers (like BlackRock, Fidelity, Vanguard and State Street) and asset owners to identify and create new metrics to measure and demonstrate long-term value to financial markets.

  • UNEP FI and 28 banks launched the Principles for Responsible Banking to define the banking industry’s role and responsibilities in shaping a sustainable future.

  • A majority of ESG indexes outperformed their non-ESG counterparts in in 2018 according to data from MSCI. Experts predict that ESG indexes will continue to outperform a majority of non-ESG during the global economic downturn forecast for 2019-2020.

  • New products and tools abound from Just Capital and Goldman Sach’s ETF and Blackrock’s ESG ETFs to the World Benchmarking Alliance SDG benchmarking; but the impact of new investment products in particular remains to be seen.

Climate risk and disclosure. Source: Bloomberg

Climate risk and disclosure

Leading banks and investors are increasingly integrating climate risk in their operations and are transitioning from measurement to management. Banks and investors are increasingly collaborating to develop metrics, engage with companies and demand greater government action on climate.

  • UNEP Finance Initiative and 16 of the world’s leading banks came together to pilot implementation of recommendations by the Taskforce on Climate Related Disclosures (TCFD) and develop scenarios, models and metrics to enable assessment and disclosure of climate-related risks and opportunities.

  • A recent report on companies’ preparedness for TCFD recommendations found that in the US, only 64 percent of financial firms have board-level oversight of climate change, compared to all firms in the UK and 82 percent in Canada. Only 50 percent of companies’ climate change risk management strategies extend further than six years out.

  • 415 investors with a combined $32 trillion in assets have demanded governments increase action to tackle climate change, signing a statement that asks governments to strengthen their Nationally Determined Contributions to meet the goals of the Paris Agreement.

  • The five-year Climate Action 100+ initiative, now backed by 310 investors with more than $32bn in assets under management, drives signatories to engage with systemically important greenhouse gas emitters and companies calling on them to improve governance on climate change, curb emissions and strengthen climate-related financial disclosures.

  • Portfolio decarbonization is picking up speed as more and more institutional investors pursue strategies to eliminate stocks with high carbon risk.

Rising Shareholder Activism for Sustainability

Driven by greater awareness of ESG risks and opportunities, as well rising expectations from society and a younger generation of investors, asset managers and banks are feeling the heat and taking greater action on ESG issues. High profile topics like gun violence, diversity, climate change and opioids are seeing the most action amongst banks and investment firms, driven by shareholder activism and more sophisticated ESG risk analysis. Asset managers are now working together to encourage better practices amongst portfolio companies on issues like gender diversity.

  • Goldman Sachs research found that Twitter posts on ESG finance topics have risen 19x since 2010. Mainly driven by discussions related to climate change, investment-related terms (ESG, sustainable investing, impact investing, etc.) have risen even more – 33x in 2017 from 2010 levels.

  • Florida Parkland high school shooting activist David Hogg made a widely publicized call to boycott BlackRock and Vanguard earlier in 2018 due to each company’s investments in gun manufacturers and retailers. While the boycott was unsuccessful, BlackRock and State Street both promised to engage gun manufacturers in conversations on increasing gun safety. BlackRock also launched two new gun-free ETF indexes and supported activist shareholder proposals requiring gun safety disclosure.

  • As You Sow and CODEPINK released Weapon Free Funds, a new tool from to help investors review their index and mutual fund investments for holdings in military contractors and gun manufacturers and retailers.

  • Further responding to rampant gun violence in the US in 2018, the CEO of investment firm Calvert Research and Management, John Streuer, successfully pressured Kroger to stop selling firearms.

  • Twenty seven companies (£10.5 trillion assets under management) have now signed a statement of intent, coordinated by the 30 percent Club, to promote more women to the senior management and boards of the British companies in which they invest. BlackRock, State Street and Vanguard are upping pressure on companies to increase diversity and are beginning to systemically vote against male-only boards.

  • Barclays set a new public policy stating it will not fund projects in World Heritage sites or Ramsar Wetlands.

What to Expect in 2019

This year will bring action, engagement and results from strong coalitions – such as EPIC, the Principles for Responsible Banking, and the US Alliance for Sustainable Finance – that formed in 2018. Financial services companies that are not part of these alliances are likely to be under greater pressure to join these partnerships.  Banks will gradually start implementing TCFD as they learn how to assess and disclose climate risk, while asset managers, investors and banks will continue to engage portfolio companies on priority topics like climate and gender. We also expect a further influx of ESG products and greater scrutiny regarding the impacts of those products.

What This Means for Business

  • Work with peers

    It is critical for financial services to work and stand together to send a united signal to governments that ESG issues are critical to long term profitability and financial success. Investors and portfolio managers must start asking strategic ESG questions during company earnings calls and roadshows.

  • Know where you stand

    With growing scrutiny on corporate actions, banks, asset managers and investors must be clear on their values and the actions they are taking to authentically embody their values.

  • Invest in ESG analysis

    From human capital to AI and big data, having the expertise and ability to analyze and evaluate ESG impacts, including climate risk and opportunity, will become a competitive advantage for banks and asset managers.

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