Sustainability is on the financial agenda worldwide
Traditional business models are being challenged by global megatrends such as ethics, climate change and social inequality, just as customers are increasingly demanding more responsible approaches from companies. This means that a number of risks - both known and emerging risks must be managed systemically, and at the same time, businesses need to embark on a change process, so that it becomes natural to think sustainably at all levels and across all their work, both in day to day operations and in planning for the development of the business.
At PA Consulting, we have produced a new report, Financial services can change the world, in which we surveyed 3,500 consumers globally and found that consumers across all age groups and geographies want their lives, shopping and banking, insurance and pensions - including all forms of investment – to be far more sustainable. Two-thirds (63 per cent) of consumers are looking for more sustainable options for products and services across all aspects of their lives, and over half are more likely to buy financial products from providers who operate according to sustainable values. The report reveals that an overwhelming majority expect sustainable financial services to become the norm (93 per cent) - and almost half expect this to be the case by 2025. As many as 82 per cent of the 500 Danes who participated in the survey believe that sustainability is important.
Financial consumers have realised how much of a positive impact their financial choices can have on their ambitions to live more sustainably - a positive impact that is up to 20 times more effective than other lifestyle changes. The supply of green financial products is considered insufficient to meet this demand and need.
Society and consumers' expectations and demands are increasing, and combined with increased regulatory requirements, new guidelines and standards, as well as companies’ increasing sustainability ambitions, means there will be significant changes in the market, culture and values. These changes bring new opportunities for the financial sector, but at the same time mean that it has to deal with completely new risks, as well as changes in existing risks.
Some of the new risks that the sector is now seeing are related to climate change, which is a systemic risk that has a major impact on the financial sector, as well as on the extent of new regulation. Global warming and more extreme weather conditions increase the risk of damage to infrastructure, buildings, etc. and affect the assets in which pension companies invest - and which the banks have mortgaged and the insurance companies have insured. Furthermore, there is uncertainty about the political agenda both locally and globally, and also about the journey towards lower CO2 emissions, which will create opportunities for some industries and challenge others. Technological development is crucial to achieving ambitious climate goals, but at the same time the development and implementation of new technologies introduces new risks that need to be addressed.
Effective management of the risks associated with sustainability requires them to be integrated into the way a company manages its other risks. This will not just be a plug-and-play solution for most, meaning they will find it challenging to use the current risk management frameworks to deal with new types of risk. There is no doubt that there will be a need for a more comprehensive adjustment of companies' risk management processes, and that reporting and data management, including ensuring adequate data and the quality of data, are the most challenging areas to put in place. However, once companies have put data at the heart of their sustainability reporting, this will be reflected in effective risk management, and promote and strengthen the company's development in meeting future regulatory requirements.
How to balance ambitious sustainability goals and risk management
In 2021, the European Commission presented its latest proposal for a new EU directive on sustainable reporting, and this is just another superstructure on top of several layers of rules, guidelines and reporting requirements that are coming down the road for financial institutions.
The increased regulatory requirements and the fear of being accused of greenwashing if you cannot show evidence of the developments you have promised mean that some financial firms may be reluctant to set and communicate ambitious sustainability goals. At the same time, the requirements for documentation and reporting can take the focus away from the essential requirement, the need to become more sustainable. That makes it crucial that compliance and ongoing risk management are considered as part of the development of processes, services and products, so that they are not seen as an extra layer that complicates the work and slows down the efforts to set and achieve sustainability goals.
The banks have started well
The way to remain relevant in a world of sustainability-conscious consumers is sustainable finance and to communicate its value to consumers in a simple way. This means, among other things, providing a larger selection of green financial products, but also that the financial sector works more broadly to meet sustainability goals, including diversity. In investment as well as financing, the financial sector has got off to a good start in the Nordic region. However, if momentum is to be maintained, it will require a sustained focus on innovation and an understanding of the wider ecosystems and the options for partnerships.
The financial sector is not yet in a high enough gear on diversity and in its work to deal with the climate footprint of internal functions, through green IT and the choice of partners and suppliers. There is also great potential from getting the internal risk management functions involved to create a robust approach, in which it is possible to manage and mitigate the new risks effectively and document how you are living up to your promises, and so avoid damaging both the company's own reputation and that of the entire sector by being accused of greenwashing.
As our report shows, in addition to the limited knowledge about the supply of green financial products, there is also a general low level of trust in financial institutions. That is why there is a need to outline to Danish customers what real opportunities they have in this area, as well as communicate and document how the sector is successfully meeting their goals. Ambitious sustainability goals and strategies must therefore never be seen as a separate branding exercise.
The Nordic financial world was a “first mover” in embracing digitalisation, and we have all been able to enjoy the benefits for many years. Sustainable finance is another area where the financial world can take the lead by both setting high standards and taking on significant social responsibility. This is best done by ensuring compliance with their ambitious goals.