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Business

2022: Our Year of Risk and Resilience

iStock 1296792726 - Global Banking | Finance

 Marco Icardi EVP and Managing Director Europe - Global Banking | FinanceBy Marco Icardi, EVP and Managing Director, Europe

There is no doubt that the past 20 months have marked a turning point with a renewed focus on assuring businesses are growing responsibly and reducing their overall carbon footprint. Looking ahead into 2022, it is likely that we will not only see businesses adopting industry specific environmental, social, and governance (ESG) standards, but we will also see regulations emerge globally requiring disclosures of ESG metrics, as well as strategic plans for businesses to improve their ESG performance.

A Focus on the Environmental

Despite some companies’ current inability to follow through when it comes to executing ESG plans, we’ve seen a boom in ESG investments over the past few years. According to Blackrock, investments in ESG have risen by 96% since 2019. This significant increase is no fluke – ESG is making its way into boardrooms and is here to stay. While ESG is much broader than just focusing on the environmental impact, the “E” aspect of ESG currently stands as leading the charge.

And while it’s clear that companies are making a more concerted effort to release greater ESG metrics, there remains a sincere focus on the environmental aspect, specifically a push toward net zero in the fight to rid our planet of excess carbon emissions. However, many companies do not understand their full carbon footprint, and those that do often do not understand the true difference between “carbon neutrality” and “net zero.” Ultimately, the goal here, as emphasized at COP26, is to secure global net zero by mid-century and keep 1.5 degrees within reach.

In addition to being ESG-aware on their own right, it’s become more important than ever for companies to consider investing in ESG-friendly companies as well. For banks and financial institutions, this means tracking companies within their investment portfolio and monitoring their ESG-related metrics.

Technology’s Role

With the world changing fast, organizations have become more reliant on technology to handle day-to-day processes that once were solely done manually. Artificial intelligence (AI) has made it easier than ever to aggregate data, allowing for a numerical-backed ESG plan to be created that gives a true idea of where an organization stands in all three areas of ESG. The rise of these tools, such as AI and machine learning (ML), allows business leaders to spend more time critically thinking about how to develop an ESG plan.

Expanding into Social and Governance Factors

While there is no denying the importance of the “E” in ESG, the entire story of environmental, social, and governance cannot be told without first considering the role that social governance plays as well. Social metrics include professional relationships, community relations, human rights, workplace health and safety, and diversity and inclusion, among other factors. The common denominator here is stability, equality, and happiness in society and local communities.  Similarly, the “governance” aspect of ESG also revolves around upper-level happenings in the workplace. In this case, however, the focus is on the boardroom, from policy-making to the roles of various directors in the c-suite. Aside from boards being concerned about their internal social governance metrics, they also look closely at these metrics within the companies they invest in. Both the “S” and “G” aspects remain crucial to investors, who will view stability and cohesiveness in an organization as one of the leading factors to consider a long-term partnership with said company. As such, it takes a well-balanced ESG plan nowadays to stand out in the business world.

The data shows that all three aspects of ESG are having a profound impact on the way companies do business. The 2021 PwC Consumer Intelligence Series Survey provided several key takeaways regarding the impact of ESG on the marketplace. In this report, 80% of consumers said that they were more likely to buy from a company that is committed to environment and governance standards with 76% of consumers preferring to buy from companies committed to social justice. Among the employees surveyed, 84% of employees said they are more likely to work for an organization that stands up for environmental priorities. 86% of employees also felt motivated to work for an organization which prioritizes social and governance commitments.

As technology continues to advance, ESG is on the path to be the next big frontier in governance, risk, and compliance (GRC). Organizations that have implemented both ESG and GRC strategies into their organizational structure have already taken a major step forward in being able to measure and report their ESG scores. The good news is the data gathering framework is already there. It is just a matter of aggregating the ESG data into insights and intelligence from an existing GRC platform and measuring it against industry standards.

As the business world continues to embrace GRC into its culture, organizations that still question the importance of a defined governance, risk, and compliance strategy should begin to rethink their approach. The world is changing fast, and GRC is along for the journey more so than ever before.

Global Banking & Finance Review

 

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