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The Inevitability of ESG in Financial Institutions: An Analysis

Updated: Jun 27, 2023

The Increasing Significance of ESG in Financial Institutions

The relevance and importance of environmental, social, and governance (ESG) principles within the world of finance have reached new heights. Today, embracing ESG is no longer a matter of choice for financial institutions, it's an absolute necessity. This notion is backed by a recent analysis from global professional services firm, KPMG, highlighting that ESG is not just a trend but an undeniable force in the finance sector.

Financial institutions' failure to embrace this new reality could potentially lead to conflict with their key stakeholders, thereby cementing the role of ESG within corporate strategies. This pivotal insight, along with others, is an essential point of discussion for all board members and management within financial institutions.

The future of finance is intrinsically tied to ESG, as outlined in KPMG's new research entitled "Voices on 2030." This forward-looking report provides key financial sector forecasts for the next eight years based on perspectives from 32 industry leaders, CEOs, CFOs, and board members worldwide. The consensus is clear: failing to adopt ESG could yield negative outcomes.

ESG in Financial Institutions

The Future: 'Every Action is an ESG Decision'

The research paper reiterates that every decision in finance is now essentially an ESG decision. This perspective covers all three fundamental components of ESG - environmental, social, and governance. The paper cautions institutions, "As stakeholder expectations grow, it is likely that your organization will have little choice but to adopt ESG. Every stakeholder group is likely to require it, and regulators and politicians may progressively require it as well."

Simply complying with the minimum legal or stakeholder requirements, or adopting a 'tick-box' approach is insufficient. Organizations need to put mission and purpose at their core, demonstrating their commitment and securing crucial financing.

Broad Insights from the 'Voices on 2030' Report

The report also provides several other expert perspectives targeted at those involved in the management of financial institutions. Among the key insights are:

  1. Data and Technology's Dominance: With the rise of mobile communication, KYC protocols, and government-issued digital currencies, firms are urged to adapt or risk being left behind.

  2. The Evolving Landscape of the 2020s: This includes stricter enforcement from watchdogs, increasingly sophisticated criminals, and novel customer experience channels like the metaverse.

  3. A Shift in the Workplace: With a move towards greater diversity, corporate collaborations, and hybrid working arrangements, the workplace is transforming significantly.

Judd Caplain, Global Head of Financial Services at KPMG, summarizes, "Concepts such as embedded finance, the platform ecosystem, and the data economy may diminish the relevance of traditional categories of financial services and suppliers."

Unpacking the Implications

The report's conclusions, drawn from insights of industry leaders like Kay Swinburne, Vice Chair of Financial Services at KPMG UK; Greg Elliot, Global Head of Tax at Standard Chartered, and Suni Harford, Group Executive Lead for Sustainability at UBS, outline the critical changes ahead:

  • ESG is now an integral component of business plans for financial services, and this is irreversible.

  • Data and technology will be dominant forces in the coming decade.

  • Businesses will reassess their talent pool needs and realign their priorities.

While it's a leap to assume that all these predictions will come true, we can appreciate the underlying themes they point towards. The realm of finance is evolving, and those willing to adapt and embrace these changes, especially in terms of ESG, will be the ones to thrive in this new era.

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