Tue 14 June 2022
A new business environment is gradually taking shape with the increasing attention to the big global challenges in sustainable issues.
According to a 2022 survey by Edelman Trust, 88% of institutional investors put Environmental, Social and Governance (ESG) on par with operational and financial considerations when making investment decisions; 60% of employees choose a place to work based on their beliefs and values, while 58% of consumers buy or advocate for brands based who match their beliefs. There will be winners and losers on this transition journey to sustainability. It will also set a path for emerging leaders. To excel in this transition period, businesses need systematic thinking for their business models and operations.
There are gaps in the expectation and reality that offer opportunities for the business and finance professionals to contribute. We look into three of them here.
First, for businesses and their stakeholders, the immediate challenge is measurement. As the management guru Peter Drucker famously put it:
“If you can't measure it, you can't manage it.”
For environmental impact, there is the new European green taxonomy known as the “taxonomy for sustainable finance”. It covers industries that generate about 80% of all greenhouse gas emissions in the EU. Similarly, in the US, the Securities and Exchange Commission is expected to unveil new rules on corporate climate disclosures. All these actions are to help stamp out so-called greenwashing in the financial sector. As the disclosure becomes more standardised, financial professionals play a crucial role in reporting, compliance and quality assurance of corporate social responsibility (CSR) reporting. Besides the regulated and official channel of disclosure and compliance, social media is an increasingly important source of alternative data for investors and other stakeholders. It can effectively highlight hidden good and bad corporate behaviour and enable comparisons of the softer aspect of corporate conduct. Here it offers an opportunity for professional services to add value through advising on the communication of CSR through multimedia and social media channels.
Second, the role of the financial services sector is important yet complicated in this transition. The trust and reputation of the financial industry are still yet to recover from the damages inflicted by the last financial crisis. In the context of this emerging sustainable revolution, it is not a surprise to see scepticism about the positive contribution of finance and the capital market. In a recent survey conducted by the CFA Institute, over 90% of the current and past Accounting and Finance students in the UK said that it is important to make a positive social and environmental contribution in their career. In strong contrast, only 7% of them believe that investment professionals can make a positive social and environmental contribution. This highlights that it is a steep challenge for the finance community to correct this ‘self-doubt’.
Only history will be the judge of the real impact of the financial services community. It is therefore important to see the credible outcome from the initiatives such as the Glasgow Financial Alliance for Net Zero led by Mark Carney at the COP26 last November. At a local level, integrating the social and environmental impact in the financing process would be at the top of the agenda for entrepreneurs, venture capitalists, bankers and public capital market investors. There is a growing recognition that some ESG factors are economically material, especially in the long term, and it is, therefore, important to integrate material ESG factors in investment decisions. How well the company is perceived in their ESG performance is expected to have a bigger influence on firms’ cost of capital in the years to come. Here, there is greater demand for systematic thinking in terms of quantifying and pricing the risk in each financial decision. Given the emerging nature of some of these issues, a trackable and transparent information system is important for internal monitory and potential external reporting.
Third, the gap between demand and supply in sustainability-related skills is big. A review of 1 million investment professionals on LinkedIn by the CFA Institute shows only less than 1% had disclosed sustainability-related skills in their profile. Yet the demand has increased significantly over the last five years. From a local experience, we find that the posting of sustainability-related jobs has increased by more than four folds from 2017 to 2021 in the Liverpool region which is against the backdrop of the overall decreasing number of job postings induced by the pandemic. There is a large market for sustainable skills training for reporting, analytics and public relations.
Overall, there are many challenges ahead; yet they present enormous opportunities. How well a company manages its ESG risk will be a key differentiator in this sustainable revolution. Just like the many previous industrial revolutions, including the internet and smart technology disruptions, businesses that adapt and innovate will survive and emerge as leaders. Business and finance professionals need continuous professional development to acquire sustainability-related knowledge through investment in research and training in order to remain ahead of the game and delivery effective services.