The convergence of sustainability principles and economic realities in the BFSI sector
The COVID-19 pandemic has uncovered how intertwined our natural and economic worlds really are! However, industry had acknowledged this fact long time ago, and it’s evident from the industry investments in the ESG (environmental, social, and corporate governance) initiatives. Recently, investor’s interest in firms that invest in ESG has also been increasing — according to a 2021 survey, 21% of global investors have made their first ESG investment in 2020, and 49% of investors intend to do so. This has greatly influenced the banking, financial services and insurance (BFSI) industry as it directly serves such investors. From shareholders to employees to customers, the expectations for integrating sustainability practices within the firms are high. BFSI has always been an early adopter of new trends influencing the industry and ESG adoption is no exception. In fact, firms that have already adopted ESG initiatives are now, not only contributing to sustainability but are also reaping higher returns and enjoying greater valuations.
The sustainability-driven paradigm in finance
There is a significant push from Millennials and Gen-Zs on firms to incorporate ESG initiatives because they prefer to invest in sustainability conscious firms. To align with the investors’ sustainability goals, BFSI firms have started expanding their financial products and services portfolios. It is becoming critical for BFSI firms to consider ESG metrics when conducting business with corporates, for example, firms are recasting the lending process by including ESG into the due diligence processes.
There are few indirect factors like climate change that are also driving the sustainability paradigm in finance. For example, climate change can lead to crop failures and putting bank’s investment at high risk. Hence, banks are considering green finance by conducting portfolio stress tests for investment decisions. To scale up such green finance initiatives, a network of 83 central banks and financial supervisors - “Network for Greening the Financial System”, was formed to define, promote, and contribute to the development of best practices to conduct or commission analytical work on green finance.
ESG — quantifying a movement
Despite the increasing popularity of ESG trends, the industry is confronted with various challenges when it comes to quantifying the impact of green initiatives. For one, the lack of standardization of metrics across businesses and regions, makes reporting difficult. Differences in data attributes and ratings impede investors from making straightforward investment decisions. Also, there is a lack of forward-looking disclosures and real-time ESG data.
The multitude of different factors within ESG makes it difficult to create reliable assurance standards. Furthermore, the lack of ESG-specific accounting rules and the non-comparability of data pose additional issues. However, leveraging AI, ML, and possible automation solutions for scanning data and extracting insights could result in better reporting systems. By addressing data challenges successfully, ESG indices can become more reliable and serve as true beacons for individual and institutional investors in making informed sustainability-driven investments.
For a more detailed review of the challenges and trends in ESG-related data, you can refer to our whitepaper that I have authored along with Kamlesh Kosare and Shohom Roy.
Emerging trends in the BFSI industry
There are a plethora of financial products emerging in the market that are developed with sustainability principles in mind. Green bonds had already emerged in 2016, enabling capital-raising and investment for projects with environmental benefits. Now the $33 billion green loan market is overtaking it in size, exclusively funding projects that contribute to environmental objectives. Commercial banks are offering sustainability-linked deals that offer organizations lower rates if they meet their ESG targets. A $520 million loan of this nature was recently refinanced by the soft drinks firm Britvic.
Sustainability is reshaping investment portfolios with 60% of ESG-linked mutual funds outperforming the S&P 500 in the first five months of 2021. Investments in ESG-linked mutual funds are expected to reach $2.08 trillion by 2025, growing at a CAGR of 8.5%. The ESG ETF (exchange traded fund) market is also growing in size.
A number of ESG consulting groups have emerged to offer due diligence, risk assessment services, and impact measurement. These firms guide various companies in making ESG-based investment decisions. Joining hands with technology partners in the BFSI space will help organizations navigate ESG processes better, drive compliance, and generate optimal value.
ESG initiatives by Zensar
Zensar is implementing green initiatives, transforming processes to reduce its carbon footprint, and integrating environmental and social factors into its corporate policy. It is driving reforms in a wide range of areas from carbon emissions and water management to happiness, diversity, and inclusion.
Zensar has laid out clear ESG targets to drive its sustainability transformation:
- 50% reduction in energy performance index by FY’30
- Increase in happiness index to 80% by FY’30 (Interim target – 78% by FY’25)
- Increase in share of women employees to 40% by FY’30 (Interim target – 35% by FY’25)
- Assessment of suppliers based on ESG criteria by FY’30
- Impacting 2.25 lakh lives through community development initiatives by FY’30
- Achievement of water positive status by FY’25
- Enhancement of data privacy protection for all stakeholders by FY’30
The climate change in finance
Sustainability is no longer an abstract term decoupled from the world of capital and financial markets. Sustainable practices are now integral to organizational performance with real implications on the brand value and bottom lines of businesses. Changes in demographic trends in the coming years — such as the increasing share of wealth of today’s young investors — will reinforce this shift. Policy changes will further pave the way for a shift from current voluntary sustainability guidelines towards harder guidelines and stringent codes in the future. Firms that are proactively internalizing the principles of sustainability will outperform their peers in the long run.
Nachiketa Mitra, EVP and Global Head - Banking and Financial Services