2022 was a hugely impactful year for ESG and sustainable finance. Across the Financial Services sector, we have had a tsunami of international and EU regulation designed to drive the sustainable finance agenda on a global scale. The pace will continue for the year ahead with 5 key areas taking precedence as firms adjust to stay ahead, plan accordingly and meet their changing customer needs.
1. Strengthening of the biodiversity agenda
Our global society rests on the ecosystem services provided by nature –with biodiversity playing a critical role in delivering these services. Those operating in the financial sector depend on and impact biodiversity through their operational activities, supply chains, financing and investment decisions.
Financial Services firms are uniquely placed in their financing, investing, and underwriting roles to be the guardian that protects and safeguards the existing ecosystem whilst also being an agent for good through restoration of the natural world for decades to come. Biodiversity will move up the agenda for financial services as they endeavour to prepare for upcoming nature-centric disclosures such as the TNFD and TNFD alongside European deforestation legislation. These will prompt firms to factor biodiversity considerations into their risk, strategy, disclosure and internal governance arrangements.
In 2023, we expect to see an acceleration of the biodiversity agenda with firms putting policies in place that focus more on how economic and business activity is affecting the natural environment.
2. Further intensification of Regulatory requirements
Regulation has been a key tenet in the drive to achieve greater levels of sustainability across all sectors. The Financial Services sector has experienced huge regulatory change in this area over the past few years -this will continue throughout 2023. There’s an increased focus on greenwashing and a reprioritisation of sustainability in terms of the overall regulatory agenda.
From the SFDR, Taxonomy alignment, the GAR and GIR ratio requirement, pillar 3 and the preparation of CSRD, the breadth and depth of obligations is mounting.
The regulatory ‘plan on a page’ now needs to be turned into an operational reality from the board down to each of the core business functions. Those who act proactively and employ a robust regulatory architecture will ensure compliance and better align with the rising stakeholder -internal and external – expectations.
3. Increased focus on energy security
Developments and expectations around ESG are deeply connected to what happens around us – politically, economically, technologically. The requirements and stakeholder expectations around ESG are closely related to geopolitical issues.
With the devastating war in Ukraine, we are seeing issues with energy insecurity and the UN has made an international appeal not to use this as an excuse to continue with fossil fuels and side-line renewables. As energy security and energy price inflation continue to have real life impacts, we expect this topic to dominate the airwaves in the first half of 2023. For the financial services sector, this means dedicated efforts will be required to close the gap in renewable energy sources, infrastructure and supporting technology by driving much needed investment through sustainable finance instruments.
4. More emphasis on the ‘S’ or Social factors in ESG
Over the last couple of years, everyone has felt the urgency of climate change – seen through the pandemic, natural disasters such as the floods in Pakistan and the calls for urgent action from Small Island States and African countries at COP.
As noted, the social impact of a company’s role in broader society is becoming an increasingly important consideration for investors. The pandemic was a key trigger that brought the social side of corporate behaviours (good and bad) to the fore.
Job functions which had previously been in the background were now reclassified as essential with a corresponding shift in employee bargaining power. Based on current trends, employees want to work for employers who value and integrate ESG into their business. Equally the rising cost of living, and threat of widespread inflation is a major factor in employee motivation and has created a further drive within worker bodies for better pay and conditions.
We will see the D&I equation adjusted to include the E or equity so those firms who add equity, will be more attractive to potential employees resulting in better performance and ultimately a stronger bottom line.
5. The expansion of Sustainable Finance
We have seen incredible growth in SLLs, sustainable bonds, and the ESG fund sector. In addition, there has been an expansion of sustainable funding products – moving from large corporates to SME -as financial institutions commercialise ESG and expand their client engagement.
There is an unquestionable rise in innovative and impactful sustainable finance instruments that will drive the ESG agenda forward, offering customers options that will deliver impactful change.
Over 2023, we will see a greater focus on firms upskilling staff and providing advice and education to their customers to help them capture the benefits of the transition to the low carbon economy.
The focus and spotlight on addressing climate change will continue with pace in 2023. For the Financial Services sector, this means real consideration of how their activities affect the natural world.
- Biodiversity is firmly on the agenda; FS firms should adopt more of a guardian role in this regard
- Regulation intensity in this area requires strategic planning to comply with stakeholder expectations
- Financial services will play key role in bridging the gaps for energy security
- More emphasis on the societal impact of business behaviour -2023 is about aligning corporate social responsibility to investor, consumer and stakeholder expectations with regards to sustainability
- Sustainable Finance options will continue to expand and develop to meet these market needs and drive impact across E, S, and G.
This article was also contributed to by Syreel Mishra, Assistant Manager, FSO Climate Change Advisory & Sustainability Services.
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