ESG in financial sector to benefit all stakeholders

Integrating ESG aspects in financial sector to benefit all stakeholders, says report

It is essential for the financial sector to include ESG factors and enhanced climate risk methods within the investment due diligence process

EY India also underlined the challenge posed by lack of standardisation in ESG marketplace as the scenario has led to "subjective interpretation" in certain cases. Credit: iStock.

Integrating environmental, social and governance aspects in the financial sector will benefit all stakeholders, and such factors are expected to remain central in boosting the economy in the post-pandemic era, according to a report.

In the report released on Sunday, leading consultancy EY India also underlined the challenge posed by lack of standardisation in environmental, social and governance (ESG) marketplace as the scenario has led to "subjective interpretation" in certain cases.

"Integrating investor expectations on ESG parameters as part of stakeholder engagement practices and sustainability initiatives will be key in the post pandemic times," it said.

Noting that there has been a shift in focus of many businesses and investors from profits to people as the pandemic unrolled, the report said it is believed that in the post-pandemic era, ESG factors will remain central to driving the economy upwards.

The report titled 'Risk, Returns and Resilience – Integrating ESG in the Financial Sector' noted that integration of 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.

"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," EY India said.

As per the report, it is essential for the financial 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 finalised, it added.

Further, the report said that instilling discipline into non-financial reporting processes and controls to build confidence and trust will also be a key factor.

Chaitanya Kalia, Partner and National Leader of Climate Change and Sustainability Services (CCaSS) at EY India, said the Covid-19 pandemic has ascertained the importance of ESG in 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," Kalia added.