Financial firms have been warned the time to talk about the Environmental Social Governance (ESG) has past and unless action is taken, they will find themselves severely behind the curve and facing the wrath of shareholders and clients.

Global management consultancy, Arthur D. Little, has published a new report “ESG – The irreversible mega-trend”, which warns that pressure from shareholders, regulators and customers will only increase as will the speed of change.

“While ESG and sustainable finance are hot topics in the financial sector, much of the debate and discussion is often still too theoretical,” stated the report. “However, given the speed at which both are gaining real traction, it is imperative that financial institutions move as quickly as possible toward practical implementation if they are to stay ahead of the game and meet the expectations of customers, partners, and investors.

“Those that refocus their business model strategically to embed ESG and sustainable finance sooner rather than later will find themselves much better equipped — not just to capitalize on, but to drive forward a trend that is not only irreversible but unstoppable. We are at the beginning of a new era of ‘sustainable money,’ in which the rules of the game are going to be very different from those of the past.”

The report continued the pace of change made action vital for financial firms.

“Take action now because ‘wait and see’ is no longer a viable option, especially so for those looking to gain any kind of first-mover advantage,” it added. “As it is, customers are already choosing banks based in part on their ESG performance – 10% say they would consider leaving their current high street bank if it were investing in dirty fuels like coal, oil, or gas.

“This could see banks that are heavily fossil funders suffering a ‘customer exodus,’ as the focus falls on them in the run-up to this autumn’s COP26 climate conference in Glasgow. That might not bode well for those historically exposed in this area, like HSBC and Barclays, Europe’s biggest fossil fuel financiers, which have invested over £149 billion in high-carbon activity since the signing of the landmark Paris Agreement in 2015. (Source: NGO Market Forces) However, they too are shifting. Barclays, for instance, has committed itself to becoming a net zero bank by 2050.”

Arthur D Little added that climate change has refine the ESG landscape.

“How has ESG gone from little more than a footnote once dismissed by some as hype to being worthy of attention not just by those ‘woke’ to such matters but by all stakeholders in both the financial and nonfinancial communities?

“The predominant catalyst has been climate change, now a top agenda item for many politicians who have enshrined their ambitions in landmark agreements (e.g., the UN 2030 Agenda for Sustainable Development, the Paris Agreement, and the EU Green Deal). While the environmental repositioning of the US under President Biden has given this issue renewed credibility, the COVID-19 pandemic has injected added impetus by focusing attention on the roles and responsibilities of high-profile organizations within wider society.

“Today, major financial institutions are beginning to appreciate ESG’s potential to create substantial value if business models are suitably redesigned to accommodate it.”

It added consequently, ESG will significantly impact how financial firms manage their relationships with clients, their peers, and suppliers. Indeed, it seems inconceivable that ESG and sustainable finance could ever be “put back in the box,” since this mega-trend likely will take us irreversibly toward a new normal, warned the report.

“This is not about any one institution becoming carbon neutral; it is about a refocusing of the entire market toward sustainability that will see ‘green money’ flowing from the EU and others to climate-neutral economic activities,” added the report. “But while institutions have begun to discuss ESG and sustainable finance with greater intensity, too often there is still a lack of substance or real direction. There is potential for any internal or external statements of ambition to be categorized as little more than ‘greenwashing.’ Yet, there does seem to be a growing recognition that this is a time for action, and that sitting on our hands to “wait and see” is no longer a viable position.”

“Take action now because ‘wait and see’ is no longer a viable option, especially so for those looking to gain any kind of first-mover advantage,” it added. “As it is, customers are already choosing banks based in part on their ESG performance – 10% say they would consider leaving their current high street bank if it were investing in dirty fuels like coal, oil, or gas.