Financial services firms can align entire ecosystems with sustainability

The Situation: Financial services (FS) firms can and must play a role in aligning themselves, their clients, and entire industries and ecosystems to the global sustainability context: decarbonizing to net-zero by 2050 at the absolute latest and addressing all 17 UN Sustainable Development Goals.

The FS firms we cover in this short report take different approaches to embedding sustainability internally and throughout their ecosystems. They must collaborate. They must learn from each other and go forward with comprehensive approaches covering the environmental, social, and governance (ESG) factors underpinning sustainability. The leaders responsible for sustainability within FS firms must trigger and continue to drive this collaboration. They must also convince their clients and ecosystems—even direct competitors—to collaborate. Only in taking collaboration throughout FS and all ecosystems to a new level can the transition roadmaps we need everyone to exist under be created and executed (see our separate outline for sustainability in 2022).

Financial services firms have a vital role in sustainability. Addressing their sustainability as organizations is step one (see Exhibit 1). Investing in and influencing companies, infrastructure, and governments presents a responsibility and a business opportunity. Firms can finance sustainable initiatives, work with the worst offenders to transition, and, as a last resort, restrict finance as required. We can find encouragement in the FS sector’s activity, but we need this activity to become the norm quickly—not remain something we’re highlighting as the gold standard.

Exhibit 1: Financial services firms hold four key spheres of influence over sustainability

Source: HFS Research, 2022

HSBC is aligning itself to the global sustainability context and mandating that its clients do the same

Despite most agreeing that COP26, the 2021 UN climate summit, marked a shift from ambition and goal setting to transition planning and action on decarbonization and broader sustainability, the UK’s announcement that public and large firms must disclose transition plans from 2023 onward got little attention. It’s not surprising. Coherent roadmaps don’t make for gripping headlines. But more than 80% of organizations don’t have the plan they need for sustainability (see our separate data). The disclosure and scrutiny of transition plans must become the norm in 2022. Financial services firms can make this happen.

HSBC will mandate its fossil-fuel-focused clients have detailed sustainability transition plans. It will then assess whether to continue providing clients with financing. HSBC will also publish a climate transition plan in 2023, emphasizing “how we plan to embed this into the bank’s strategy, processes, policies, and governance.” It commits to phasing down fossil fuel investments aligned to limiting global warming to 1.5-degrees; it also commits to supporting energy industry clients to transition. HSBC is working with broad sources of sustainability expertise and global networks to achieve its aims. Its approach mirrors our sentiment:

We believe we can have the biggest impact on climate action by actively engaging our clients on their transition, focusing on the need for robust and credible transition plans, and by providing the financing and advisory solutions that help unlock the investments needed.

–Dr. Celine Herweijer, Group Chief Sustainability Officer, HSBC

Smart and pragmatic financial services firms are working WITH their less-popular clients to make sustainability a reality

There’s a heated debate around the right approach to sectors responsible for much of climate change, including the oil and gas industry. To think that we can meet the sustainability goals staring us in the face without the industry on board is dangerously idealistic. For example, rather than knee-jerk divestment of fossil fuel-focused investments only for a private or less-caring investor to take over and allow these assets to continue unchanged, work with investors to make the transition happen. Financial services firms can set the standard.

In certain cases, the balance of the power of a statement (by divesting) and the power of working with firms to transition are less clear than they are for FS firms. The University of Cambridge is a local example we frequently discuss: Does maintaining close ties with fossil fuel firms and pushing them to decarbonize while also taking on research that helps that aim have more impact than divesting? The answer is not easy. But this example is an order of magnitude below the impact that the FS industry can have in helping its ecosystems change. BFS firms are beginning to outline distinct strategies for helping less-kindly-thought-of clients transition.

Citi has set interim emissions reduction targets for key sectors like energy and utilities. It pledges to work with all its clients on net-zero transitions that align with the firm’s roadmaps and reporting, including in mapping out decarbonization pathways for industries. Like most FS firms, it has also pledged sustainable finance; it aims to facilitate $1 trillion by 2030. It expects clients to measure and communicate emissions and plan to improve asset sustainability, warning that failure to do so will affect the services Citi provides. Citi plans to work with the fossil fuel sector to encourage responsible retirement of assets, with divestment a last resort.

We will actively engage with our clients across all relevant sectors to map out what decarbonization pathways look like for each industry.

–Jane Fraser, Citi CEO

The CEO of BlackRock also said it simply:

Divesting from entire sectors—or simply passing carbon-intensive assets from public markets to private markets—will not get the world to net-zero.

–Larry Fink, CEO BlackRock

A final example is Coutts (reportedly the bank of Queen Elizabeth II… and Stormzy, a British rapper). It is integrating ESG throughout its products and services (which we detail here) and successfully convincing its clients to join the journey.

Many FS firms are expanding their portfolios to offer sustainability-specific services

JP Morgan recently established a sustainability-focused private investment team. It will invest in growth-stage private companies that drive resource efficiency and climate adaptation solutions across various industries. JP Morgan has made a 10-year $2.5 trillion sustainable development target. It is looking beyond itself to what the organization can achieve throughout its global ecosystem:

We are in a unique position to leverage our global scale, data science capabilities, and the expertise of our sustainability leaders to source and invest in best-in-class companies driving the sustainable future.”

–George Gatch, Chief Executive Officer, J.P. Morgan Asset Management

A final case is Santander, which this March acquired ESG consulting firm WayCarbon to expand its portfolio with ESG consulting, management software to implement and track ESG strategies, and carbon credit trading capability. It will gain 170 employees in 18 countries. Santander has also partnered with Enel, a European utility giant, to develop clean energy solutions and finance to support its clients to transition.

The Bottom Line: FS firms must learn from each other and collaborate—and get their clients and ecosystems to do the same—to fix the global sustainability context. The alternative is unthinkable.

The FS leaders responsible for sustainability must trigger collaboration between their FS partners, competitors, and the ecosystems they influence. The promising examples covered here are still too few and far between. The whole of FS must investigate many approaches; incorporating ESG metrics into executive pay and incentives is one additional route we didn’t detail here.

If FS firms can’t realize the opportunity and responsibility, climate change and social problems will continue to grow, regulators will reach a cliff-edge point, and, to be very deliberately dramatic…freak out. Governments will panic once climate change begins to influence elections more distinctly. All organizations should be thinking about how to get ahead and help set the benchmarks that policymakers will default to, rather than being the organization or industry desperately catching up—or the FS firm unprepared to help them.