Recapping 2023 ESG Trends for BFSI Companies

Growing concerns about climate change and rising carbon emissions have not singled out the global banking, financial services, and insurance (BFSI) sector. Being the financial watchdog of the economy, BFSI companies have a serious ethical obligation towards sustainability. Emerging ESG trends are proof of this shift. Moreover, moving towards a sustainable economy can help banking and financial firms increase their revenue by 10% by 2023, suggests the Alvarez & Marshal report on environmental, social, and governance (ESG) as a business opportunity!

The BFSI industry is at the highest risk of ESG scrutiny in terms of business ethics. Interestingly, 2023 has been a watershed year for the banking sector especially with the urgency to adopt ESG standards, integrate it into their banking standards, and ensure that ESG is embedded in their lending framework. To this end, regulatory bodies are drafting guidelines and policies to integrate ESG into banking and financial companies’ risk management framework.

Banking leaders like the Bank of America and J.P Morgan Chase have committed to achieving net-zero greenhouse emissions and improved sustainable financing and investments over the upcoming decades. For the ancillary sectors such as insurance, non-banking financial services, wealth management, and others, 2023 ESG trends would be a surefire ambition turned into action.  Now, let’s explore the five global shifts that are driving BFSI companies towards ESG commitments:

1. Era of Conscientious Consumers: In the banking field, nearly 62% of customers of more than 2,000 banks reportedly want their banks to play an active role in helping them curb the environmental impact, finds the recent Cogo research. Since the COVID-19 pandemic, consumers’ brand perceptions have undergone a massive shift. Consumers are conscientious and willing to pay more for products or services that are healthier, safer, and environmentally friendly. Similar trends are seen among employees who prefer associating with brands and businesses that hold high environmental, social, and ethical standards.
2. Increasing Climate Risks: BFSI companies play a crucial role when it comes to combating climate and environmental risks. As credit lenders, banks facilitate the transition to renewable-based energy sources. Drastic climate impacts such as hurricanes, floods, wildfires, and other calamities affect insurance companies and also affect borrowers’ loan repayment capacity, leading to high delinquency rates. These climate shifts have become major proponents of insurance ESG trends.
3. Rise of Green Finance: Another interesting trend in the financial sector is green finance, which is a mix of financial products that are designed exclusively to combat environmental and climate risks. They include investment in sustainable technologies, renewable energy resources, green bonds, and energy-efficient infrastructure to regulate carbon emissions and promote a sustainable economy. Brands and businesses with strong ESG practices are more likely to receive green finance. Additionally, it is revealed that global business leaders have an equitable role in leveraging green finance to meet ESG objectives. About 61% of them are ready to invest in sustainability initiatives as well as energy-efficient computing and IT.
4. Technology Disruptions: Recent technological breakthroughs with AI and robotics-driven innovations are built to remove constraints with automation but also carry the risk of job replacements in the BFSI sector. The implications of technological disruptions are debatable but need intervention by regulatory bodies to formulate ESG policies for fair human capital management to prevent social disruptions.
5. Carbon Price Hikes: As economies are looking to transition to net-zero emissions they are also including carbon pricing regulation policies to reduce greenhouse gas emissions. The increase in carbon prices to €100/tCO2e starting from 2025 coupled with the tensions from the Russia-Ukraine war are hurdles to fulfilling immediate energy requirements and calls for more affordable and sustainable alternatives.

Reasons to Include ESG Considerations in BFSI Products and Services

There are several research-backed indications about the sustainability-led actions leading the pulse of BFSI sector. To ensure the promises of sustainability are met and not underdelivered amid evolving ESG trends in financial services, cutting-edge technology solutions for risk management for ESG help BFSI companies to comply with emerging ESG trends, govern ESG programs, evaluate risks associated with operations, comply with sustainability standards, and devise strategies for promoting sustainable business growth.

AI capabilities embedded in the ESG management platforms spur efficiency beyond legacy practices that are riddled with the risks of inaccurate data entries, manual errors, and repetitions through automation. We have already discussed the importance of ESG company valuations for investment firms and the role of the platform. Let us go through the benefits of including ESG considerations into BFSI products and businesses:

• Better Capital Investment Opportunities: ESG investments were roughly around $17.1 trillion in 2020 in the U.S. alone, according to the data by S. SIF foundation, a sustainable investment trading company. Financial and banking companies that adhere to ESG considerations and integrate it in their operations and workflows have better access to capital which is sourced by institutional investors or customers who view ESG compliance as an ethical compulsion.
• Reduced Risk Propensity: BFSI firms can invite an array of risks to the investors and insurers if they do not establish ESG data control and governance. Non-compliance with the regulatory framework can attract hefty fines and penalties. Integrating ESG into the core business functions and products using AI, drive better decision making, and review current processes to meet ESG requirements, reducing the overall risk propensity rate.
• Brand Differentiation: In today’s hyper-competitive climate, ESG could become a brand-differentiating factor for BFSI companies. Internally, it will help the BFSI organizations deeply embrace culture and behaviors focused on sustainability and also implement structural changes, employee training, and sustainability programs.
• Customer Loyalty: BFSIs can easily shelve the cost of retaining and engaging a new customer by ESG compliance. They can leverage today’s consumers’ propensity towards brands with strong ESG considerations to achieve customer loyalty.

ESG Data Governance: A Way of Keeping Up with 2023 ESG Trends

As BFSI firms are slowly inching towards meaningful change, the lack of standardization and the highly fragmented structure of the ESG landscape emerge as roadblocks to understanding and implementing ESG reporting. In 2022, there were significant efforts by various international regulatory agencies for the convergence of clearer ESG standards and consistent ESG integration. Recently, at the UN Climate Change global summit in Glasgow, the  International Financial Reporting Standards (IFRS) Foundation announced the formal inception of International Sustainability Standards Boards (ISSB) in public interest to provide a comprehensive global guideline on high-quality sustainability disclosure standards. The IFRS also decided on a complete consolidation of other important boards for sustainability reporting standards to drive institutional arrangements and lay the technical foundation for global sustainability for the financial markets.

Data governance is the focal point for many banking and financial institutions. Meeting ESG-related data disclosure and governance standards requires a significant IT change to collect, aggregate, store, and report data from applications to data integration models, and overall system architecture. Moreover, ESG data must be blended with the credit lending models and financing products and decisions.

The existing voluntary data standards fall short of regulators’ expectations for obtaining, analyzing, and disclosing ESG information. Historic reporting, legacy data processing technologies, legacy thought leadership, and third-party customer data sharing are the common impediments that BFSI companies endure. Therefore, they require redefinition and readjustment of their data architecture and governance models to avoid ESG data and reporting gaps. To help better navigate the ESG data roadmap, BFSI companies need to define and adopt best practices for ESG data management.

Five Best Practices for ESG Data Management for BFSIs

1. ESG Platform Selection: BFSI companies require a technology platform that can well integrate into their business strategy, financial, risk, and data platforms, data models, and policies, and modernize their IT and tech architecture to drive efficiency and create new opportunities around ESG-related aspects. Additionally, the ideal platform will provide real-time insight into the ESG-related aspects of the investment portfolio, financial products, and services.
2. Building ESG Data Governance Roadmap: Creating comprehensive policies and a set of rules around data collection, processing, sharing, monitoring, reporting, privacy, and risk management with key performance indicators and remediation information allows for better accountability and governance roadmap.
3. Establishing Data Management Roles: For better transparency around data flow across the value chain and regulation, BFSI companies need to invest in creating data management positions, authorities, and teams dedicated solely to ensuring the standards are met and managed under a clear corporate data governance framework.
4. Creating a Unified Source of Truth: Platform for managing ESG data should also help break down operational, structural, and functional silos within the organizations. BFSIs must look into integrating decoupled architecture with standardized API-led architecture. Cloud-native platforms can help leverage scalability and real-time, anywhere access to ESG information to enable firm-wide monitoring and risk management, creating a centralized source of truth.
5. Integrating ESG into Processes & Workflows: Once the ESG requirements are thoroughly confirmed, BFSI firms need to ensure they are communicated internally to their employees with relevant training and support, revise current data policies and practices to comply with ESG requirements, and build a formal data plan that is compatible with evolving ESG regulations.

Managing 2023 ESG Trends and Related Goals

Managing ESG-related goals in the era of rapid digitization can be overwhelming for BFSI companies that are already tested with a slew of geopolitical regulations and economic shifts. Today’s state of climate risk and environmental situation is the reflection of the change we aspire to bring in the world for a better and safer tomorrow. Business leaders and regulatory agencies have the ultimate power to steer an equitable and accountable BFSI ecosystem where sustainability and ESG are at the heart of the financial framework.

Our multi-disciplinary teams work with leading BFSI companies and leverage their experience to help businesses stay abreast of emerging ESG trends. Our expert teams will collaborate to understand the company’s long-term objectives to architect a solution that aligns with the business ideals and culture. You can contact the iTech team today to learn about your business’ needs surrounding ESG software and risk management.