Financial institutions should embrace ESG Software and in-house ESG frameworks

Chong Hye-seung

"Considering that a large share of company value is intangible and relates to future earnings, it is evident that risks and opportunities deriving from environmental and social trends are of great importance," claimed Martin Hancock, previously chief operating officer at Westpac.

Today, consumers are significantly conscious of and vocal towards sustainability, demanding transparency and accountability from corporations regarding their business management strategies and decision-making practices. The unexpected occurrence of COVID-19 has also magnified the accelerating need for integrative business models that take both social responsibility and sustainable investment into account.

Acknowledging the interconnection between social welfare and business prosperity, various national governments and corporate institutions have initiated ESG integration.

ESG integration is a systematic approach toward environmental, social and governance practices through capital allocation and corporate policy arrangement. This facilitates the rise of new value creation opportunities, improves stock liquidity, and fosters longevity of product or service lifespan, while simultaneously mitigating the possibility of climate risks and environmental turbulence.

Financial institutions, including commercial banks, investment banks, brokerage firms and insurance companies, are no exception from the move to embrace ESG factors through a reassessment of business strategies.

As part of the investment value chain, financial market players are highly dependent on the vibrance of their surrounding social environment, one that illustrates a prospering yet stabilized economy, interactive capital exchange and dynamic engagement of civil society stakeholders. To benefit from the advantageous environment described above, financial institutions must adopt ESG factors as part of their business strategy.

So, what type of ESG practices should they embrace?

First, utilizing ESG software systems can leverage efficiency for data management.

Banks, a key player within the capital market, are exposed to vast amounts of information that come from both their customers and the surrounding business landscape. The digital maturation of banking activities has extended the areas of data collection, making the task of efficient database management even more challenging.

Such an extensive volume of information is almost impossible to assess through manual procedures. For institutions to achieve greater operational efficiency at cost-effective conditions, data evaluation should be conducted by a computer-based reporting system, such as ESG software.

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ESG software is an automated assessment module that identifies well-performing and underperforming characteristics based on environmental, social and governance criteria, and allows the gathered information to be expressed through a quantitative measure. Not only does it provide comprehensive insight for the user company, but an organized display of ESG records can also function as a supporting tool for retaining existing stakeholders as well as attracting new ones.

Research from Deloitte's Better Banking Survey illustrates that 71 percent of consumers are more likely to engage with a bank with a positive social impact, and 61 percent would leave the bank if the institution was found to demonstrate any social or environmental harm.

As highlighted in the survey, providing a transparent ESG report has become crucial for businesses to gain stakeholders' trust in addition to minimizing risks of reputational damage. Hence, ESG software technology can benefit the financial institution by enhancing performance evaluation efficiency and the level of transparency yet with lower cost and less effort.

Secondly, financial establishments should devise an in-house ESG framework that reflects their geographical background and market characteristics.

The global pressure towards social and environmental commitment for businesses has triggered the formation of numerous non-profit organizations that provide a framework for ESG reporting.

Institutions like the Climate Disclosure Standards Board (CDSB) offer a set of standardized guidelines to help companies better document their environmental, social, and governance ecosystem as a method of achieving greater transparency and accountability for investors and consumers.

However, following an ESG framework assembled by an external source has limitations of being unable to address the geographic differences of businesses as well as lacking consideration of specific industry conditions.

For instance, a certain element or procedure can possess a higher degree of importance in Korea, but may not be the case in Japan, due to the existence of unique demands in different countries. This statement may also apply to the difference in characteristics between capital markets and the real estate industry.

Therefore, financial institutions should develop an internal ESG guideline that mirrors their geographic and distinctive market status for improved relevance and better performance outcomes.

Day by day, the demand for high-level transparency and reliability of businesses is increasing, and many researchers have claimed that ESG integration is the key to satisfying such requests. Therefore, companies should take swift action of incorporating ESG practices into account, before it is too late.

Chong Hye-seung is a student at the State University of New York Korea.