- Integrating investor expectations on ESG parameters as part of stakeholder engagement practices and sustainability initiatives will be key in the post pandemic times
New Delhi, 20 December 2020: Integration of environmental, social and governance (ESG) aspects in the financial sector will pave a path for all stakeholders being considered in the decision-making process. This will result in real world impact benefiting everyone, according to ‘Risk, Returns and Resilience – Integrating ESG in the Financial Sector’; a report by EY India.
There has been a shift in focus of many businesses and investors from profits to people as the pandemic unrolled; the most concerning issue was the safety of the people. Issues like access to healthcare and societal welfare were topping the list. The transmittance of this instability has affected the carbon economy the most. Industries intensive on carbon including airlines, mining, steel etc were drastically impacted. However, it is believed that in the post-pandemic era, ESG factors will remain central to driving the economy upwards.
Sandip Khetan, Partner and National Leader, Financial Accounting Advisory Services (FAAS), EY India said, “ESG challenges such as climate change, have profound implications for businesses, the economy and society at large, thus offering opportunities for both, the society and businesses, to achieve long-term economic and social growth. The financial sector is in a great position to drive this transition to a sustainable economy and a stable future.”
Chaitanya Kalia, Partner and National Leader, Climate Change and Sustainability Services (CCaSS), EY India added, “The COVID-19 pandemic has ascertained the importance of ESG in the businesses to manage risks, improve returns and build resilience for a crisis-resilient long-term value creation. As we look at the financial sector from the ESG lens, investors need to evaluate environmental and social issues that have a profound and direct role in the economic revival.”
The report also underlines the ESG integration challenges highlighting that there is a lack of standardization in the ESG marketplace. Being a relatively new concept, ESG lacks a conclusive methodology to define its different concepts and there is a variation in the analysis of ESG across different communities and jurisdictions. This has led to increase in subjective interpretation in certain cases where asset managers label the product as ESG but do not put in adequate ESG safeguards while making investments.
The financial sector needs to consider employing ESG factors by enhancing ESG strategy and methodologies in investment decision-making. It is essential for the sector to include ESG factors and enhanced climate risk methods within the investment due diligence process, risk-management processes, stress test and portfolio impact assessment. The sector also needs to stay ahead of the regulatory tide and prepare for upcoming deadlines while critical technical standards and specifications are still under discussion and not yet finalized. Instilling discipline into non-financial reporting processes and controls to build confidence and trust will also be a key factor.
Findings from the recent EY’s Global Investor Survey, covering views of ~ 300 institutional investors on Environmental Social and Governance (ESG) performance, show a clear trend towards increasing integration of sustainability or non-ﬁnancial factors in investment decisions.