The number of Environmental, Social, and Governance (ESG) investing-related announcements coming today from banks and financial services firms have gained momentum. Banks are continuously building new ESG products and services like green loans, sustainability-linked loans (SLL), and carbon-neutral banking. Capital markets are embracing “green underwriting” while asset & wealth managers are steadily moving towards ESG investing. Goldman Sachs announced an investment of US$750 billion in sustainable finance over the next decade. Additionally, HSBC launched a new strategic ESG solutions group focusing on the bank’s full range of ESG capabilities. Blackrock and Vanguard have expanded their ESG exchange-traded fund (ETF) offerings due to the high demand.
In our previous blogs, The Importance of Integrating Environmental, Social, and Governance (ESG) Mandates into BFSI Enterprises’ Operations, and Choosing the Right Partners in the Expanding ESG Product Ecosystem we highlighted how BFSI firms are setting up ESG priorities for their organizations due to the regulatory push and to support the clients’ growing ESG needs. We also tried to decode the evolution of ESG vendors’ landscapes, specifically in the data and analytics space. In this blog, we discuss the enormous opportunity (exhibit 1) available for IT service providers, technology vendors, and consulting firms to support BFSI enterprises on their ESG agenda.
Exhibit 1: Endless opportunity for IT service providers and consulting firms in the ESG space
The IT outsourcing and consulting vendor landscape is always finding ways to differentiate itself in the BFSI industry known for its talent and arbitrage play. The present BFSI clients and prospective targets for many IT service providers have listed ESG as a priority area and are planning to invest heavily in this space. The vendors are hence gearing up to build a differentiation story for sustainability, have boldly laid out their ESG priorities, and are making announcements that will help them stand out in the industry not only for their ESG offerings but also as responsible businesses. This becomes important since the vendors will be an extension of the BFSI firms’ own ESG footprint, which they would like to manage better.
BFSI firms are looking at vendors to embrace best-in-class ESG standards, have diversity in talent base, manage the carbon footprint, invest in local communities, and bring exponential value creating ESG initiatives. We do observe IT service providers and consulting firms already trying to display differentiation around these dimensions. In October 2020, Infosys announced its ESG 2030 vision, which outlines its bold vision to become carbon neutral by 2030. SAP has announced that it aims to achieve carbon neutrality within its operations by 2023. IBM intends to leverage blockchain to ensure responsible sourcing of minerals in conflict regions. Capgemini has used AI/ML to help staff rural healthcare with real-time data sharing and efficient economic resource utilization.
Our research suggests that ESG reputation of the vendor, appropriate disclosures, and the vendor’s resilience to the impact of ESG related issues will become important drivers for awarding large IT outsourcing contracts. A strong ESG standing of the vendor is moving from a “nice to have” to a “must have” factor for mega IT outsourcing and platform contracts. We have already witnessed cases where differentiating ESG standing is helping vendors win deals. For instance, Finastra has been selected by Climate First Bank as its technology partner for a new, full-service, eco-friendly community bank. The Bank evaluates its vendors through an ESG lens, and Finastra stood out for its clear and tangible commitments to redefining finance for good. TISA, the UK’s cross-industry financial services membership body, appointed Atos to build a blockchain-based digital utility for the asset management that will help ease regulatory reporting for MiFID II and ESG. Atos had to demonstrate enthusiasm to be a part of a sustainability-led project to win this engagement.
We believe that ESG transition goes far beyond just ESG data capture, analysis, and dissemination. The financial institutions will have to follow a “practice what you preach” approach as they start prioritizing sustainable investments. The focus should be on transforming their entire ecosystem to:
ESG is becoming a board-level priority for BFSI firms with C-suite executives as key stakeholders, creating opportunity for vendors to address new budget centers parked for the entire value-chain. These will be an addition to the CIO or digital budgets that have been traditionally used for such use cases.
ESG investing is a market-driven shift leaving room for a lot of product innovation for the IT outsourcing and consulting landscape. It opens opportunity to launch new offerings like:
IT service providers and consulting firms are aiming for a first movers’ advantage and have already introduced ESG offerings into the market. Tata Consultancy Services (TCS) announced that it will develop an investment insights solution, leveraging SAP Business Technology Platform, enabling asset managers to have a 360-degree view of the investments, which includes ESG analysis. IBM and The Climate Service (TCS) formed an alliance to help financial institutions measure, quantify, and price risks associated with climate change facilitating reporting. Avaloq has launched a sophisticated ESG investment solution for banks and wealth managers that allows them to build tailored, personalized ESG-compliant portfolios for clients. Microsoft will be launching an ESG Solutions as a Service in 2021 in collaboration with MSCI.
Exhibit 2: A sneak peek into the ESG vendor landscape
The ESG integration journey for enterprises is going to result in massive investments towards data and technology. IT service providers and consulting firms need to create an ecosystem of partners that they can collaborate with to build their ESG offerings and take them to market. Investments in R&D to incorporate emerging technologies like Artificial Intelligence (AI), Natural Language Processing (NLP), Blockchain, and Machine Learning (ML) while creating ESG solutions is needed. They should also concentrate on utilizing the ESG benefits in their offerings across dimensions of IT services delivery, talent, infrastructure, and solutions, and create ways to measure and demonstrate the ESG impact of their offerings to drive higher client adoption.
As BFSI firms accelerate their ESG journey, it becomes critical for them to create the right partner ecosystem. Making the right choice will bring out the difference!
We also invite ESG data and analytics providers, IT service providers, and consulting firms to reach out to us to get featured in our upcoming research assessing ESG vendors that serve BFSI enterprises. Please refer to our Research Participation Guide to understand the scope, objectives, and participation process of the research.
The ESG platform/product vendor ecosystem is expanding at an exponential rate, with banks increasingly collaborating with the larger network following the pandemic. Large banks such as Citibank have collaborated with Truvalue Labs to accelerate their ESG research initiatives. Similarly, in the UK, Lloyds Banking Group has partnered with Sancroft to obtain insights and advice on the best ESG practices. US-based specialist asset manager Trillium Asset Management has collaborated with Trucost to conduct a carbon analysis of its sustainable opportunities strategy.
In our previous blog on ESG, we highlighted that – while the ESG ecosystem is evolving within the Banking and Financial Services (BFS) industry – firms fail to recognize its potential to generate long-term risk-adjusted returns. In this blog, we explain the evolution of the ESG product and platform vendor landscape. These products are helping BFS firms think and act on ESG proactively and tap into several opportunities that the ecosystem offers.
In response to the demand for robust ESG integration, vendors are offering various products and services, ranging from raw data and reports across multiple ESG areas to extremely sophisticated analytics platforms. The focus areas for these firms include stock screening, portfolio construction and analysis, competitive benchmarking, risk management, green bond framework evaluation, second party opinions, scenario analysis, controversy analysis, ratings, and rankings.
The ESG vendor landscape itself can be broadly divided into three categories: data and data analytics providers, technology providers, and ESG advisory firms.
Data and data analytics providers use unique ways of sourcing, categorizing, and quantifying ESG data before building an analytics layer over it. Based on coverage, these providers can be further categorized as ESG market data providers, ESG exclusives, and ESG specialists.
Consulting and advisory firms assist financial services firms and other enterprises in building data and governance frameworks, integrating ESG, and facilitating their regulatory reporting strategies. In fact, taking note of ESG’s growing importance, firms such as esg.solutions, NEPC, Sancroft, Callan, State Street, Clearbrook, Goby, ASC Advisors, KKS Advisors, Canterbury Consulting, and Mercer have introduced ESG consulting as a separate arm within their consulting practices. We believe that the ability to highlight ESG issues that affect financial performance will be a differentiating factor in this arena.
The exhibit below showcases the vast and expanding ESG vendor landscape today.
Exhibit: Understanding the ESG vendor landscape
With such an expansive and thriving market for ESG services, it may be difficult for leaders to choose the best-fit vendors.
Some characteristics that will help financial institutions distinguish among data and analytics vendors are market coverage, quality and quantity of ESG indicators, investments covered, methodology, sources, support to standard frameworks, and company involvement.
Also, market intermediaries such as stock exchanges, rating agencies, reporting and regulatory bodies, index providers, and ETF providers play an equally important role in developing the right ESG ecosystem. Hence, BFSI firms need to collaborate with the right mix of data, regulatory frameworks, and technologies. It is complicated, but ultimately provides a lucrative opportunity to IT service providers to offer innovative ESG products and solutions and provide custom-built solutions on partner products tailored to banks’ specific needs. This will ease the transition and change management process for banks and financial institutions. A few service providers, consulting leaders, and boutique consulting players have already created frameworks and solutions to help banks with their ESG needs.
We are confident that over the next decade, ESG will not be discussed as a standalone or secondary strategy but will be a mainstream financial services proposition, creating sustainable long-term value, not only for investors and BFSI enterprises but for the entire ecosystem.
We also invite ESG data and analytics providers, IT service providers, and consulting firms to reach out to us to get featured in our upcoming research assessing ESG vendors that serve BFSI enterprises. Please refer our Research Participation Guide to understand the scope, objectives, and participation process of the research.
Banking, Financial Services, and Insurance (BFSI) firms are under increasing pressure to operate more sustainably, mindful of their economic, social, and environmental impact. This implies conforming to Environmental, Social, and Governance (ESG) regulations, which mandate enterprises to be conscious of: their impact on the environment; their relationship with employees, suppliers, clients, and communities; and robust standards on company leadership, risk management, and stakeholder rights. Further, voluntary guidelines such as the Equator Principles, UN Principles for Responsible Investment (PRI), and recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) are forcing banks to incorporate ESG as part of their lending, investment, and financing decisions. We strongly believe that today’s voluntary commitments will soon be replaced by hard regulations, and, hence, organizations that embrace these mandates sooner will be ahead of the game, if that comes to pass.
Three aspects drive ESG integration in BFSI operations today: 1) reputation, marketing, and public relations; 2) growing client demand for ESG-conscious investment practices; and 3) regulatory burden. ESG enhances BFSI firms’ brand perception for all stakeholders, including millennial talent, which is more attracted to brands that take firm actions around ESG mandates. Advances in technology and the use of AI / big data / ML are further helping combat challenges related to ESG measurement.
However, these drivers fail to factor in the significant potential to generate long-term risk-adjusted returns through ESG compliance. Our research suggests that firms that can better navigate environmental and social disruptions, while incorporating good governance practices, will be able to mitigate risks and create long-term value.
The exhibit below highlights the various factors contributing to banks’ increased focus on sustainability or ESG.
Exhibit: Factors driving banks’ increasing emphasis on sustainability
The COVID-19 pandemic served as the first real proof point that ESG investing can future-proof investments and boost returns even in uncertain times, with sustainable funds outperforming their more conventional counterparts. Consequently, ESG investing solidified its position as a dominant feature across the financial services landscape in 2020, with investments in sustainable funds in the US almost twice the previous year’s total.
Leading credit rating agencies such as S&P and Moody’s have indicated that innovative ESG initiatives will help BFSI firms improve financial performance, in turn providing the monetary resources to further enhance their ESG strategies. Further, large fund management firms such as BlackRock Inc., Vanguard Group, and State Street Global Advisors, are making ESG-focused investments. In February 2021, Vanguard appointed Fong Yee Chan as the firm’s first head of ESG strategy for the UK and Europe.
BFSI firms that can swiftly integrate a comprehensive ESG strategy into their investment plans will be able to capture a greater share of ESG asset flows. Such a comprehensive strategy would comprise five aspects:
Asset managers should therefore think fast and come up with dedicated strategies to capitalize on the opportunities and gain competitive advantage in the long run.
Traditionally, ESG was incorporated through exclusionary screening, in which investments that did not align with an enterprise’s beliefs and values were dropped. Later, practices such as thematic investing (supporting a particular ESG area), impact investing (focusing on creating a positive change rather than only financial returns), and best-in-class selection (selecting investments with positive ESG performance relative to industry peers) emerged. Gradually, we are moving toward a comprehensive ESG integration model, wherein investors are systematically and deliberately including ESG-related factors into their complete financial analyses.
However, the lack of a standard taxonomy to capture ESG performance, low quality ESG reporting by companies, and the deficiency of robust ESG data pose major challenges to this integration. Technology vendors in the BFSI space can help enterprises understand ESG processes, ensure compliance, and generate optimal value. These partnerships are increasingly important at a time when corporate ESG disclosures are dramatically improving – 80% of the world’s largest corporations use Global Reporting Initiative (GRI) standards today. Further, the number of signatories to the PRI has increased from 63 investment companies in 2006 to more than 1,700 signatories with US$81.7 trillion in Assets Under Management (AUM) today. In recent times, the International Integrated Reporting Initiative (IIRC) and Sustainability Accounting Standard Board (SASB) frameworks have also been gaining enterprise attention.