The financial sector has a broad and multifaceted risk management landscape where environmental social governance (ESG) principles reign with great prominence. The newest generation of investors has placed tremendous emphasis on socially-conscious and environmentally conscious companies, with their ESG-friendly governance practices and protocols.
The ever-increasing emphasis on environmental and social governance issues has prompted investment banks and brokerage firms to incorporate ESG considerations into their investment strategies. The objective: highlighting organizations that exemplify their environmental- and social consciousness in their practices, product/service offerings, and business strategies (amongst other things). In doing this, brokerage firms and investment banks can cater to investors who are in search of investment opportunities that align with their own values and principles. But this begs the question: how can banks and brokerage firms incorporate ESG into their investment strategies?
What is ESG? And How is ESG Related to Investments?
ESG — which stands for environmental and social governance — is a concept that has gained tremendous popularity in recent years, spanning all industries and business types. Environment, society, and governance are regarded as the three pillars of ESG frameworks, which are used to guide a company’s practices and policies as they relate to ethics, sustainability, and social consciousness. In the course of strategizing and deploying new ESG initiatives, companies often find that they can pinpoint new opportunities in addition to identifying vulnerabilities and potential areas of risk.
ESG investing has gained tremendous popularity in recent years. Investors have been using ESG as a screening tool of sorts as they attempt to identify companies that share their values and concerns for the environment, society, and beyond. This pushes ESG into the risk management arena to some degree because failure to address these issues can translate into an area of vulnerability. The reason: a company’s lack of social consciousness or environmental-consciousness impacts the public’s view of that organization. This can be to a company’s detriment because a business that’s viewed negatively will have a lower valuation in the investment arena.
It’s clear that ESG principles are becoming increasingly important in the business world, which may lead you to wonder: how can investment banks and brokerage firms incorporate ESG into their investment strategies?
How to Incorporate ESG into an Investment Strategy
More and more businesses are looking for ways to integrate ESG into their investment strategies. But actually achieving this goal can be rather challenging since the concepts associated with ESG are so broad and nebulous. Consider these tips for integrating ESG principles into an investment strategy for your brokerage firm, investment bank or other financial institution.
Develop an ESG Task Force
Most investment banks and brokerage firms have a risk management committee or task force in place, but few have a group that focuses exclusively on ESG-related matters. ESG is viewed as a sub-topic of risk management and mitigation so it makes sense to establish a task force with individuals from the company’s risk management committee. An ESG task force will play a critical role in the development of new initiatives within the company and offerings to investors, both prospective and current.
Identify Existing Strengths in the Realms of Environmental- and Social Consciousness
Take the time to identify “low-hanging fruit” as it relates to the company’s governance in the areas of social-consciousness and environmental consciousness. Once you identify these strengths, you will be better positioned to expand your existing ESG initiatives or programs.
Develop an ESG Investment Program
ESG investing is rapidly gaining favor amongst all types of investors, particularly the youngest generation in the investment arena. Consider the development of an ESG investing program that caters to these individuals. This sort of program can take many forms, such as developing your firm as expert in eco-friendly investments. When you establish your brokerage firm or investment bank as an expert in a particular niche, you can use this to your advantage as you work to connect with prospective clients. As the saying goes, you’ll fail if you try to be all things to everyone; it is better to be everything to one person. By developing an ESG investment program, you’ll be in a good position to target and connect with the right clientele.
Identify All ESG-Related Opportunities Within Your Organization
It’s important that your brokerage firm or investment bank exemplifies the values and ethics that they promote to clients. It may appear disingenuous if a brokerage firm specializes in ESG investments, yet the company makes no effort to pursue ESG-related initiatives (an issue that’s examined in the next section). To avoid this, you must identify existing and prospective ESG initiatives. List out each area of opportunity and establish an action plan using an ESG software platform. It’s also possible to map out your ESG action plan using a risk management software system. Lots of these risk management platforms now include ESG-related components.
Showcase Your Existing ESG Initiatives
It takes a fair amount of time, money, and effort to develop environmentally-conscious and socially-conscious initiatives within an organization. Yet many companies fail to actually showcase these measures to prospective clients and the industry as a whole. ESG reporting offers one method for highlighting a company’s commitment to these more progressive ethics and values. But the most successful companies will go beyond this to showcase their environmentally friendly and socially-progressive efforts. It’s a way of saying “We practice what we preach.” A firm’s internal ESG-related initiatives can be highlighted in marketing materials, on social media channels, on the company website, in pamphlets, and in other literature that will be provided to current and prospective clients. You’ve done the leg work; don’t keep it a secret. Your investment bank or brokerage firm can effectively maximize the benefits and ROI by promoting this hard work to clients, potential clients, and the industry as a whole.
Putting ESG Framework Software to Work for Your Investment Bank or Brokerage Firm
It’s clear that ESG will only continue to rise in prominence both in the investment world and across the broader business world as a whole. It’s no small task to manage your organization’s in-house ESG initiatives and the ESG-friendly investment programs offered to customers and clients. But this is where an ESG software platform can prove to be very beneficial.
ESG software systems offer an ESG framework that is designed to guide a company’s efforts in this realm. You’ll also find other useful features within these platforms, such as project planning-type tools that allow you to develop, collaborate and deploy ESG action plans. Risk management software solutions often include ESG framework modules. These can be quite useful for managing the vulnerabilities and risk factors that arise in conjunction with an organization’s ESG efforts (or lack thereof, as the case may be). Unfortunately, there is no one-size-fits-all ESG framework software solution, but this is where iTech can help.
At iTech, we specialize in the development of custom ESG and risk management software. Our goal is to empower our clients with the tools and technology that they need to succeed in today’s highly-competitive financial and investment space. We take the time to acquaint ourselves with a client’s business strategy and challenges. Then, we develop a solution that solves problems and drives the company toward its business goals. Contact the iTech team today and let’s begin a dialogue on your risk management and ESG software-related needs.