It is a long-held misconception that paying attention to environmental, social and governance (ESG) risks compromises returns.

Increasingly, workers and customers are drawing links between socioenvironmental issues and the multinational corporations with immediate influence on them; from product portfolios and investment choices to labour practices and pollution outputs. Government policymakers, investors and other stakeholders are also assessing whether businesses have identified and are managing ESG concerns.

Pre-pandemic, the ramifications of ESG initiatives were mostly seen in valuations rather than any real-world impact. In 2022, accusations of greenwashing inflicted financial and reputational damage on leading banks such as HSBC, Barclays and Deutsche Bank. Subsequent implementation (or lack thereof) of genuine ESG policies – outlined below – has significantly affected their trajectories.

Organisations that address ESG risks now will be prepared when internal and external pressures culminate in a macroeconomic environment in which financial performance will proportionately relate to a proven track record of ESG projects.

Drivers of ESG initiatives

ESG concerns are underpinned by both carrot and stick. Figures cited by the Business and Sustainable Development Commission show that adoption of the UN’s Sustainable Development Goals (SDGs) – the leading ESG framework for large companies – could boost the global economy by $12tn a year and generate 380 million jobs. Moreover, socially conscious customers are more inclined to vote with their wallets, encouraging businesses to reappraise their ‘mission’ and product ethicality. Top-line growth and cost reductions are also by-products of legitimate ESG commitments.

Conversely, these commitments are also imposed by government legislation. Top-down commitments to limit carbon emissions are being matched with new regulations aimed at corporate tax disclosure, predominantly for the benefit of investors. In July 2020, the EU Green Deal became a prominent benchmark, mandating and standardising corporate disclosure of ESG documentation. The US Securities and Exchange Commission (SEC) soon followed suit.

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ESG in finance: the Deutsche Bank scandal

Industry-leading financial companies will address ESG concerns relating to public pressure. As put by Stephen Walker, Lead Analyst of Banking and Payments at GlobalData, “The volume and velocity of opinion change in the social media age can blindside even the most progressive institutions, making it impossible to get in front all issues, all the time (such as ‘cancel culture’ in banking).”

Legal reprimands and reputational damage inflicted on high-profile banks are shifting attitudes across the sector. In May 2022, Deutsche Bank’s headquarters in Frankfurt were raided twice by the federal police and German financial regulator BeFin. DWS, the bank’s asset management branch, were found to have sold $1tn worth of investment products under the misleading pretext that they were environmentally friendly. In the aftermath of the raids, Asoka Woehrmann (CEO of DWS) resigned, while Deutsche Bank shares fell by nearly 3% according to Business Insider.

Financial service providers are gradually accepting that greenwashing is neither viable nor ethical. Companies that wish to emerge as thematic leaders must make genuine ESG commitments supported by tangible action – or risk divestment, public scrutiny, and even legal action.

HSBC’S shift to ESG

HSBC learnt this lesson the hard way. Alongside Deutsche Bank and Barclays, the London-headquartered banking group has been subject to greenwashing accusations for providing $19bn in funding for projects led by fossil fuel giants like Exxon, Shell and BP. These three banks were among the founding members of the Net-Zero Banking Alliance, a UNEP initiative geared towards decarbonisation strategies.

In May 2022, coinciding with the Deutsche Bank raids, HSBC’s Head of Responsible Investing Stuart Kirk claimed that “climate change is not a financial risk we need to worry about” at a conference in London. Noel Quinn, CEO of HSBC, distanced the bank from the remarks, and Kirk was subsequently suspended.

Five months later, the Advertising Standards Authority (ASA), the UK’s advertising watchdog, banned two HSBC advertisements for “misleading” representations of the company’s environmental initiatives. Once revered as a slick PR machine, HSBC’s senior management fumbled to rectify their reputation.

ESG concerns were fundamental to this rebuild. In 2022, HSBC had the highest number of ESG-related corporate filings among leading banks (479). According to GlobalData’s Company Filings Analytics Database, HSBC have also recorded the most ESG filings across the last five years (3,936 filings), 33% more than second-placed Morgan Stanley (2,621 filings).

GlobalData predicts future winners

GlobalData’s Thematic Research considers these filings when determining a company’s adaptability to ESG challenges – along with new ESG deals, jobs, and patents per company.

Based on this data, the thematic system ranks financial services providers on a scale of one (vulnerable) to five (dominant). This score indicates the company’s likelihood of emerging as a long-term winner.

DBS, USAA, Alphabet, BBVA and Ant Group are among the companies best positioned to take advantage of future ESG disruption in the financial services industry, GlobalData’s Thematic Research shows.

While GlobalData research also identified TSB, Deutsche Bank, Nationwide, Unicredit and NatWest as most vulnerable to the ESG, it is a theme anticipated to change significantly.

“Two years of being force-fed ESG is leading to a backlash of consumer resentment”, says Stephen Walker. “A manifestation of that was Glorifi, the new digital bank in Texas marketing itself as ‘anti-woke’ and targeting gun owners. It had slightly parodic features like discounted home insurance for gun owners, and debit cards made from shell casings – but it was backed by Pete Theil. Though it has since failed, it speaks to a growing segment of people that don’t want to be told what they should do and want, and just want their bank to function properly.

The most recent incarnation of this issue is the number of politicians having their accounts closed because of their political views; from Farage having his Coutts account closed, to Jeremy Hunt being denied a Monzo account. Such efforts are neither consistent nor genuine. Look at any truly global bank (HSBC, Citibank etc) and the advocacy of gay rights. Displays of rainbow colours on the company logo are enthusiastic in markets where it is fashionable and likely wins customers – such as the UK and US – but completely absent in Eastern Europe and parts of the Middle East or Africa where it is likely to lose them customers.”

ESG insights from the top-ranked company

As the only company that scored 5/5 for ESG, DBS significantly boosted its ranking in context of adaptability to disruptive themes. The Singapore-based banking group accomplished this through various ESG initiatives.

Environmental: In 2022, DBS provided $15.4m in sustainable financing loans in alignment with the ambitious and all-encompassing set of decarbonisation targets in its ‘Our Path to Net Zero – Supporting Asia’s Transition to a Low Carbon Economy’ report. The upshot? DBS received the “Financial Leadership in Sustaining Communities” award from Global Finance.

Social: DBS acted as a coordinator for a $1.7bn five-year green loan to the Hysan Development Company and the Chinachem Group in Hong Kong. This community-oriented development project will build 60,000 square feet of urban parkland, as well as footbridges to encourage walkability and connectivity.

Governance: Determined to avoid the greenwashing blunders of Deutsche Bank and HSBC, DBS has adopted MSCI ESG Ratings (covering funds, bonds and equities) for demonstrable transparency over the ESG components of clients’ investment portfolios.

Lingering disregard for ESG plans

Legislation and pressure from government have superseded consumer pressure as the leading reason for setting ESG policies. Enforceable rulings have heightened ESG focus; GlobalData’s ESG Sentiment Polls reveal that, in Q1 2023, 55% of the respondents were aware that their company had an ESG strategy, up from one-third in the previous quarter.

However, trust in corporate ESG strategies has never been lower. Just over 10% of respondents believed that businesses are fully committed to ESG plans, while 46% of respondents stated that, for most companies, ESG plans were just a marketing exercise. Anti-greenwashing laws, such as those implemented by the EU in 2022, are yet to have the desired effect on ESG credentials.

Even with these legislative, financial and consumer pressures, macroeconomic themes such as inflation or conflict are seen as more immediately disruptive than ESG themes. GlobalData’s ESG Sentiment Polls also show that, in Q1 2023, ESG themes’ perceived importance decreased to 8% - down from 10% in Q4 2022.

From inflation to geopolitics, macroeconomic themes continually take precedent ahead of ESG themes. While the recent bankruptcy of Silicon Valley Bank demonstrates the immediate threat of macroeconomic disruption, the threat of neglecting ESG projects is long-term, poised to inflict ill-timed damage on organisations when least expected.

As a secular trend, ESG is projected to embed itself in the core of modern business, extending far beyond the financial sector. Those companies that will emerge successful during the ESG Revolution will find time to make ‘tomorrow’s problem’ an urgent issue for today.