ESG in Banking: The Future of the Financial Sector

Consumers, investors, and business leaders alike are becoming more committed to climate action, ethical labor and manufacturing practices, and other causes important to them. As a result, more companies are seeking to align their financial interests and practices with socially conscious concerns. To measure a company’s alignment with Environmental, Social, and Governance (ESG), a set of standards was developed to consistently represent an organization's corporate financial interests related to its sustainability and ethics.

Banks and financial services companies have many incentives to align their operations with ESG metrics. For asset management companies, banks, and insurance providers, integrating ESG into operations is no longer just the right thing to do, it is a business imperative. In this article, we’ll explore the growing importance of ESG in banking and financial services, and we’ll share key data management best practices that support the successful integration of these metrics into daily operations.

What Is ESG in Banking?

ESG began as a form of socially responsible investing in the 1960s, but it became prominence at Davos in 2020. The World Economic Forum (WEF) and the International Business Council (IBC) led an effort to establish a set of standardized measurements to create an organized framework for companies to report their results related to ESG issues. Let’s explore how ESG is driving positive change in the financial sector.

Environmental, social, and governance factors

ESG factors are the set of criteria used to evaluate the sustainability and ethical impact of a business decision or investment. Here’s a breakdown of each factor. 

• Environmental: Environmental factors describe environmental impact, including carbon emissions, energy use, natural resource conservation, water consumption, and waste management

• Social: Social factors refer to social impact, including labor standards, human rights, employee health and safety, product safety, diversity and inclusion, community engagement, and customer satisfaction

• Governance: Governance factors are related to a company’s governance structure and practices, including transparency, accountability, compliance, data security, risk management, executive compensation, and board composition

How ESG is measured

Different metrics are appropriate for different industries. ESG ratings agencies, such as MSCI, Sustainalytics, and ISS ESG, rate companies based on their performance of items on a list of predefined criteria. For banking and financial services organizations, ESG performance is typically reported via sustainability reports, annual reports, and various other methods of disclosure using both quantitative analysis and qualitative assessments.

Importance of ESG in Banking and Financial Services

Financial institutions have a unique opportunity to use their influence and resources to affect positive changes for the planet and the people who call it home. By integrating ESG considerations into their investment, banking, insurance, and other financial products, companies can maintain profitability while making good on their customers’ and investors’ desires to promote sustainable practices, support social causes, and foster responsible governance. Here are five key benefits of integrating ESG in banking and financial services.

Improved brand reputation

Companies that prioritize ESG factors are perceived by customers as more responsible and ethical. As environmental and social concerns grow more prominent, organizations that pledge to respect these factors improve their brand reputation.

Access to capital

Increasingly, individual and institutional investors actively search for companies that adhere to ESG factors and avoid those that don't. As a result, financial firms that incorporate ESG considerations into their operations have more access to capital.

Increased customer loyalty

Customers who value social and environmental responsibility prefer doing business with companies that support their values. Incorporating ESG considerations into operations is a significant selling point for attracting and retaining these customers.

Lower risk profile

Ignoring ESG factors can create significant financial risk for investors and insurers. Banks that place strong emphasis on ESG factors may be better positioned to manage the risks associated with environmental and social issues.

Competitive advantage

The finance industry is a competitive one. Operational alignment with ESG factors is a key differentiator, allowing financial institutions and financial services companies to set themselves apart from competitors and become leaders in the growing field of sustainable finance.

ESG Data Management Best Practices

Successfully integrating ESG factors into decision-making processes begins with the effective management of ESG-related data. But ESG data management is often hampered by the complexity and diversity of data sources, the lack of standardized reporting frameworks, and aging data infrastructure. Let’s look at four ESG data management best practices that improve the accuracy, consistency, and transparency of ESG data. 

Create a single source of truth

ESG-related data is generated by a patchwork of fragmented systems that make it difficult to work with. Using a cloud data platform, organizations can bring all ESG data together in one place and easily scale multiple workloads across the business.

Improve data accessibility and collaboration

While internal ESG-related data is, of course, valuable, banks and financial services companies can significantly benefit from adding ESG data sets from reliable data providers to strengthen their portfolio construction, investment research, financial planning, and regulatory reporting workflows. Additionally, secure data collaboration with customers and partners provides another source of valuable ESG-related data.

Enhance oversight and transparency

Data governance and secure data sharing are crucial to integrating ESG because governance and security are ESG factors in and of themselves. Financial organizations must have a strong data governance strategy in place with appropriate policies and procedures. All technology must include comprehensive security features and be compliant with government and industry regulations. 

Incorporate ESG workloads into workflow tools

To more fully satisfy stakeholder requirements, companies may choose to outsource their entire data pipeline and risk management tools to managed platforms. Contracting out ESG reporting can help businesses focus on their core operations.

Integrating ESG with Snowflake

The Snowflake Financial Services Data Cloud allows banks and financial services companies to manage their ESG data more effectively, helping them centrally integrate, join, and store ESG data to power workloads across the business. By aggregating and integrating data from ESG ratings providers, sustainability reports, and regulatory filings, organizations will gain a comprehensive view of their ESG performance and easily identify areas for improvement. And with direct access to specialized third-party ESG data for organizations across the buy side and sell side, companies can leverage specialized ESG data from industry players such as MSCI, Factset, and S&P Global.

Read How to Build an Efficient Enterprise ESG Data Strategy in Banking with Cloud and Machine Learning to learn ways of implementing enterprise-wide ESG investment, risk management strategies, and the technologies needed to build out ESG data pipelines.