The impact of the ESG on financial sector supply chain relationships

The term Environmental, Social and Governance – better known as ESG – has become synonymous with a global movement towards a better world, a world of greater diversity and inclusion where there is wealth and opportunity for all.

Within the UK, there has been particular momentum in the climate change agenda, where the government has its Net Zero Strategy and the Green Finance strategy, an approach to greening the financial system, mobilising finance for clean and resilient growth, and capturing the resulting opportunities for the sector. In order for the financial sector to be truly optimised to deliver these long-term sustainable outcomes and to fully embrace the push for ESG, firms must aim to bring every part of their business, including their supply chain environment along on the journey.

The supply chain sustainability agenda

The push for sustainability for financial services has recently seen a focus on third party and supply chain arrangements. This looks at the importance of ensuring those providers consider the impact of their services on the environment, what it means to be sustainable and puts governance at the forefront of the discussion. This focus has become crucial as dependencies on third party and supply chain arrangements across the financial sector continue to become a significant part of how we operate.

As we continue to evolve our thinking on sustainability in our supply chain arrangements, we have identified some of the key challenges that may be stumbling blocks to long-term success in the collaborative push on ESG in the supply chain:

  1. Inconsistencies in the methodologies used by data providers and subsequent ESG ratings in the assessment of third-party resilience. Addressing these inconsistencies requires a range of baseline methodologies and rating categorisations with further opportunities for organisations to work collaboratively towards their sustainability goals.
  2. Transparency within supply chains and the importance of the right level of detail in ESG assessments in order to ensure risks such as insufficient or incorrect data, or ratings calculations are taken into consideration. This provides an opportunity for best practice and sector recommendation on the ESG ecosystem. There are already several major initiatives underway for specific issue areas, and the work of the IFRS’ International Sustainability Standards Board (ISSB) could have significant value in creating consistency on how firms along the supply chain report on their sustainability-related risks.
  3. Lack of due diligence principles guiding the ecosystem of providers, assurers and aggregators aligned to legal and regulatory requirements. There is an abundance of existing frameworks and standards across the ESG landscape, this provides an opportunity to provide a clear common set of workable due diligence principles.
  4. Varying maturity levels within supply chain providers in understanding the ESG agenda in alignment with financial sector expectations. This could create an opportunity for financial sector education and awareness programmes targeted at smaller suppliers to embed and uplift their ESG programmes.

Many organisations across the sector have initiated a supply chain ESG programme to progress action on sustainability in supply chain arrangements, working closely with UK Finance on what needs to be done to identify better behaviours as well as to define what good looks like for the financial sector.

Conclusion

The growing ecosystem of science-based standards, frameworks and data providers must be considered, and harmonisation sought where possible. This is an opportunity to bring the ESG agenda to the forefront of technology innovation and supply chain relationships, leveraging existing frameworks and standards. We welcome industry collaboration with ESG specialist data providers, aggregators, rating agencies and assurers and look forward to where this journey takes us as firms respond to the urgent ESG challenge.

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