Funds and financial services firms need ESG strategies

Gone are the days when considering environmental, social and corporate governance factors in investing was an option. Today, ESG is central to any solid business strategy.

Consider PwC’s recent announcement that it would spend $12 billion over five years to hire 100,000 more employees to address climate and diversity issues and invest in new technologies like artificial intelligence. That should be a serious wake-up call for any private company on the fence about ESG.

Many financial services firms have already acknowledged that regulators and investors are demanding more action on identifying, quantifying, reporting and managing their ESG risks. PwC's move underscores the opportunities that the firm sees ahead. At Apex we are seeing similar shifts from this change, watching firsthand how funds and advisers are being affected by a rapid growth in the size of their client base.

In the U.S., sustainable funds attracted more than $50 billion in capital in 2020, doubling from 2019, according to Morningstar. In Europe, more than half the money that flowed into European funds last year went into sustainable products, according to the Association of the Luxembourg Fund Industry. At the same time, the International Data Corporation noted how more than 90% of executives surveyed last year considered ESG issues "important" or "very important" to driving enterprise value. And our clients have told us that ESG integration is leading to increased value, especially at the point of exit.

WILD WEST OF ESG RULES

Unlike in the European Union, the U.S. lacks rules designed to push financial services firms to incorporate ESG considerations into their portfolios. That doesn't mean they aren't coming, though. In March, the Security and Exchange Commission launched the Climate and ESG Task Force in the Division of Enforcement to “proactively identify ESG-related misconduct,” for example. If the SEC continues to move forward in the European vein, it will likely implement reporting standards to make it easier to compare firms' sustainability efforts, too. While those standards may only technically affect public companies, investors are likely to expect private companies to follow suit.

Meanwhile, firms like PwC already know the importance of staying on top of reporting requirements even if they aren't yet mandatory. That's no easy task for companies, though. No single framework or set of ESG standards exist. Instead, there are competing frameworks, from the GRI Standards to Task Force on Climate-Related Financial Disclosures. Some are rules based. Some are based on principals. Each comes with pros and cons.

The good news is the accelerating push for ESG is likely to harmonize standards and reporting sooner rather than later. The bad news is that companies, for now, are adrift when it comes to guidance.

In my view, the best-positioned companies are finding single-source solutions that allow them to forget about the vacuum and focusing on their operations. They’re putting their front and back offices in order, shoring them up with expertise and updating their processes and technology to be more tailored, more nimble and more flexible for the demands to come —from regulators and from investors — in areas like ESG policy development, data collection and report generation.

ESG EQUALS COMPETITIVENESS

As consumers and investors increasingly embrace ESG considerations, transparency across organizations and supply chains will be key to staying competitive. After all, communicating the importance that a company places on sustainability is just as important as quantifying and validating its efforts via metrics and reporting.

ESG needs to become embedded in the very fabric of a company and fully integrated into its corporate culture. Utilizing a third party to collect, rate and report its ESG data is proving an important step in showing how a company is not marking its own homework. Note how PwC, in addition to hiring, is increasing training in climate risks to supply chains and other topics. It is also creating an ESG "academy" as well as new leadership institutes to ensure that executives, directors and staff are all on the same page.

Incorporating sustainability into investing is no longer a choice if companies want to stay competitive. Updating your organizational structure, processes and culture to meet the challenges of this revolution is the route to getting ahead of the pack.

Andy Pitts-Tucker is managing director of the ESG Ratings & Advisory sector at Apex Group.