Earlier this year, the Institute of International Finance (IIF) and consultancy Deloitte shared the results of a survey looking at how financial institutions deal with environmental, social and governance (ESG) principles and what might be the best corporate role to lead those efforts. In essence, they asked whose job should it be to translate a company’s often vague sustainability ideas into actual business decisions. The question leads to the heart of the ultimate sustainability challenge. After much progress, sustainability still struggles to get to the centre of business strategy.
This is obvious from the IIF/Deloitte survey, too. It gathered the views of senior managers dealing with sustainability in a group of 70 banks, asset managers and insurers across the world, with a combined $16tn lending book and total assets under management of $19.7tn.
The conclusion was that financial institutions need a chief sustainability officer (CSO) who should exert influence and raise awareness within firms about the relevance of ESG. An advocacy role is pertinent, given that this is still a relatively new area with limited availability and quality of data. But the role also requires product knowledge and an appropriate surrounding structure to support it. Some in the survey noted this; the vast majority did not.
Product knowledge
Defining sustainability skills is also essential. While some of the respondents to the IIF/Deloitte survey pointed out the need for a more practical approach — “you have to know how the product works,” as one respondent said — product and market knowledge are only fourth in the priority of desired abilities. Strategy and influence sit at the very top, and with some distance, say the authors. Somewhat reassuringly, risk analysis came in third in the skills ranking. But, as the report points out, “strategy without technical content makes it hard for the CSO to persuade”.
After much progress, sustainability still struggles to get to the centre of business strategy.
Others agree with this sentiment. “You need subject-matter experts, but also someone to understand the business. When the business strategy changes so must the sustainability strategy — they go hand in hand,” says Åse Bergstedt, a consultant who was previously CSO of private equity firm International and, before that, chief sustainability strategist at Nordea. Ms Bergstedt is frustrated to find that, too often, heads of sustainability do not understand the technical challenges of bank products, or do not have counterparties within product divisions. Privately, some sustainability professionals, even at large banks, admit that talking to the business can still be a struggle. “It is important to have CSOs, but who are they going to talk to? They need [sustainability] people to talk to within business areas,” she says.
Strategic transformation
Governance is a key issue. In the IIF/Deloitte survey, less than a third of participants reported directly to the chief executive. The second-largest group (13%) said they reported to the head of communications or marketing instead. At the very least, this does not help wipe out greenwashing concerns, externally or internally. “If you’re reporting to the head of marketing and you’re trying to influence someone in risk, you’re pushing a boulder uphill. They’re going to perceive what you do as a marketing campaign, when really you’re aiming for strategic transformation,” said a respondent. And while the importance of ESG risk is better understood, due in no small part to the attention of supervisors, the conversation is only slowly evolving to attract business.
Ms Bergstedt says that when talking about sustainability, she is mostly asked to advise on due diligence matters, not on what the opportunities that environmental and social considerations open up. And even when firms seek out the help of consultants, she says, “external advisers are useful only if they have a good internal contact that understands both sustainability and your business”.
Silvia Pavoni is the economics editor at The Banker.
