Responding to ESG risks and challenges – A priority for the finance sector

Many environmental, social and governance (ESG) considerations are driven by pressure from investors and business leaders and by compliance requirements. These considerations include activities like product development and risk management, ESG data collection and reporting, collaboration internally and with external partners, and the latest regulations.

Establishing sound governance

Regulators throughout the finance industry are certainly strengthening their ESG frameworks. The European Banking Authority (EBA), for example, is establishing regulatory and supervisory standards for ESG risks. The authority requires firms to disclose “how climate change may exacerbate other risks within institutions’ balance sheets”, and how they seek to mitigate those risks. The EBA also says that such disclosures are vital to market discipline, because they enable stakeholders “to assess banks’ ESG-related risks and sustainable finance strategy”.

However, according to a recent Deloitte poll, only about 45% of professionals are confident that their organisation’s financial reporting teams can meet proposed and existing regulatory requirements. One view is that this necessitates “the creation of a new role ESG controller to ensure standards for data integrity are met”, an idea that is “gaining popularity among companies as they seek to meet these requirements”. But how might such roles lead to genuine change?

Meeting social requirements

For one thing, to encourage firms to direct their lending and investment exclusively towards organisations that promote and respect social causes, whether they operate in the private, public or third sectors. Socially responsible investing (SRI) is accelerating: SRI assets now represent more than 36% of global assets under management and are projected to total $53 trillion by 2025.

For another, by recruiting diverse talent and promoting accessibility. Thomson Reuters are “ensuring inclusivity and combating proximity bias”, and making digital tools and technologies and physical workspaces equally accessible to all. Staff diversity is central to performance, because in commerce, as in government, a lack of diversity results in narrow, low-quality decision-making. For example, a November 2023 Blackrock study found that gender-balanced companies comfortably outperform their peers.

Prioritising the environment in light of climate change

Individual initiatives can seem minor in themselves, but have a positive effect when taken together. We are aiming for full digitisation of audit confirmations, a function that still relies on many paper-based processes. As well as mitigating against fraud and cyber-attacks, digital confirmations are  eco-friendlyThe World Counts estimates that paper comprises half of all business waste.

Financial enterprises have a moral and legal obligation to meet their net-zero commitments and protect society from the disruptive results of climate change. If they fail to adjust their investment behaviour, this can have a seriously negative impact on the environment. For instance, fossil fuel funding by the world’s 60 largest banks reached $669 billion last year, according to Banking on Climate Chaos.

However, the regulatory and commercial pressure on banks to demonstrate sustainability is rising. As Elizabeth Beastrom, Thomson Reuters’ president of Tax and Accounting Professionals points out, “in a world that demands responsible and forward-thinking financial services, banks and auditors should be optimising and incorporating ESG considerations into their core strategies”.

In its publication, Looking Ahead: ESG 2030 Predictions, KPMG estimated that “55% of Global GDP, which is equal to $41.7 trillion, depends on high-functioning biodiversity and ecosystems”. KPMG’s report also referenced SmartCompany’s finding that “65% of international dealmakers believe ESG is a key consideration when making investment and M&A decisions”.

Taking up the ESG challenge

As firms’ ESG profile increasingly influences their reputation and performance, they must integrate regulatory requirements into their operating model, and address ESG risks and opportunities in their reporting procedures, policies, and decision-making. The window for doing so is beginning to close, and the time to act is now.

Thomson Reuters® Confirmation is the leading digital platform and global network for confirming financial data. We help auditors, bankers, lawyers, and businesses around the world work more efficiently, find truth in financial data, and detect fraud. Recognised as the industry standard for digital verification worldwide, today Confirmation helps 1.5 million customers in 170 countries to confirm financial data. 

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