Has only half the financial sector understood ESG risk?

This a worrying finding of our latest survey of mid-market UK businesses. Financial Services is at the forefront of climate change risk with the PRA requirements and with ESG high on the regulatory agenda. Is your FS firm staying on top of ESG risks?

The rise of ESG priorities

Our survey of UK mid-market businesses showed that ESG was seen as the highest priority for 38 per cent of respondents, higher than for any other issue including COVID-19. What is more, 25 per cent were pledging to go to carbon neutral or achieve net zero operations. 31 per cent thought that there was a high risk of losing business if they failed to meet acceptable ESG standards over the next five years. This indicates just how important ESG issues have become for businesses. These businesses are customers of financial services firms.

Financial Services respondents largely mirrored this with 42 per cent seeing ESG as their highest priority and 38 per cent feeling there was a high risk of losing business if they don’t get ESG right. This is good news. Less positive is that 48 per cent of the financial services firms surveyed did not perceive more than a low risk from ESG over the next five years. This suggests that many may not understand the commercial threat to their businesses.

Financial services and the response to ESG

Our own discussions with financial services firms have revealed some distinctions between FS firms. It is firms that offer longer term credit, investment opportunities or property related insurance that are prioritising ESG. This may reflect that in these areas the ESG risks are much more tangible, transparent and easier to assess.

However, what FS businesses must be aware of are the indirect consequences of growing ESG priorities. Their investors, customers and counter-parties are increasingly making ESG a big factor in selecting who they want to work with. This means that those FS firms not able to demonstrate sufficient ESG credibility risk losing business having to offer additional financial incentives to compensate.

We are already seeing the big players in the financial services sector setting out the ESG criteria that their customers, partners and counterparties will need to meet.

ESG assessment – the key for financial services firms

We would always advise financial services firms to undertake thorough assessments of the ESG risks they face and how they are positioned to address those risks and the underlying issues.

We are seeing that those firms that carry out robust climate change/ESG assessments typically find the potential impacts are wider and potentially deeper than they originally realised.  The assessments are usually a catalyst for action and provide a platform successfully managing ESG issues and risks.

It may be that what our survey is showing us is that a lot of financial services firms are at an early stage of evaluating their exposures to ESG issues and risks. If you have not yet prioritised addressing the ESG risks faced by your FS business, we would advise to do so as soon as possible to avoid a nasty shock.