Taking an ESG-infused approach to governance

Keeping up with expanding expectations

It seems that nearly every sector of the global financial services industry has committed, in one way or another, to more sustainable practices in pursuit of a future that is more environmentally sound and better aligned with societal priorities. Individually, multinational banks have committed hundreds of billions of dollars to improve economic opportunities within their local communities. Investment management firms have built up a wealth of ESG funds that hold more than $35 trillion in assets, a number expected to grow to $53 trillion by 2025. Pension funds have become some of the biggest supporters of ESG shareholder resolutions in the U.S., while insurers are using ESG performance scores in their underwriting and portfolio management decision-making.

This all sounds promising, yet many businesses continue to rely on outdated internal governance policies and practices that were crafted without consideration for tracking progress and measuring impact. Compensation incentives, for example, remained tethered to traditional performance metrics rather than being affected by ESG-related targets.

Previously, well-intentioned ESG reports and ambitious sustainability goals were enough to assuage public calls for greener practices. Now, consumers are holding banks to higher ESG standards, while employees are demanding corporate action that aligns with their values. At board meetings, shareholder resolutions are often impacted by activist investors, and there is now an increased focus on non-financial performance measurements.

Building ESG initiatives into your approach to governance

A changing world and shifting markets mean that financial institutions need to take additional steps to infuse ESG considerations into their governance frameworks. Plus, strengthening ESG-focused oversight for initiatives can help an organization meet changing stakeholder expectations and boost public perception. ESG considerations should be woven into the fabric of every financial services organization, rather than an afterthought attached to previously existing plans and priorities. 

There are four pillars that stand out for their potential for financial institutions to infuse ESG considerations into their long-term strategic planning: oversight structure, compensation structure, policies and risk management, and transparency and accountability.

Oversight structure determines how a board, its committees, and the senior management team are structured, which either allows for ESG matters to rise to prominence or fall to the wayside. When it comes to compensation structure, executive compensation is a powerful lever for boards to prompt change and increase accountability throughout their organizations. Policies, regulations, and processes have a direct impact on the effectiveness of corporate governance, and something like a company-wide code of conduct can help teams both walk the walk and talk the talk. Transparency and accountability encourage business practices that instill confidence among stakeholders, therefore helping to drive enterprise value. It’s a win-win.

A brighter, greener future

Successfully migrating to this multistakeholder model and fulfilling expectations can lead to better returns, valuations, and risk management. In other words, an ESG-infused governance model helps an organization achieve not only its ESG goals, but also its financial, regulatory, and strategic priorities. In this report, learn why valuing a company based exclusively on financial performance has become an outdated approach, and how governance factors that drive decisions must account for the wants and needs of all stakeholders—including those focused on ESG objectives.

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