Why the Financial Services Sector Will Need to Embrace ESG

After the 2020 global pandemic, ESG investing has slowly started taking over the financial landscape. Even those who claimed it was just a passing fad are no longer convinced — it seems that it’s here to stay, after all. Now, the pressure is on the financial services sector: will it have to accept the new state of things? To answer that question, we need to take a closer look at ESG and its importance.

What Is ESG?

If you’ve taken even a remote interest in finance, you’ve surely heard of the acronym ESG. In the last few years, everyone’s been talking about it and its impact on businesses and the economy. ESG advocates have become particularly vocal after the COVID-19 pandemic started, claiming that the only way to avoid future economic disasters is to embrace it.

So, what exactly is ESG, and why has it stirred up so many conversations? Well, in short, ESG stands for Environmental, Social, and Governance, and it encourages responsible, conscientious investing. In other words, this movement invites investors to reexamine the companies they are supporting and hold them to a higher standard.

Now, that may still be a little vague, so let us clarify. A company that follows ESG standards has to implement certain practices that support environmental protection, social justice movements, and ethical operations. It’s not enough for a business to claim it does care about these things — it’s the actions that count. And by investing in companies that hold themselves accountable, investors show an example to other businesses, too, thus promoting ESG.

Why the Time to Embrace ESG Has Come

Obviously, ESG is a great movement with a noble goal, but how come everyone’s talking about it now? The answer is simple — the world has never been more eager for change than now. With that in mind, let’s take a closer look at why ESG might be just that change we need.

COVID-19 Has Reshaped Our Economy

Looking back on the past few years, it’s easy to see a distinction between the time before COVID-19 and the time after it. The global pandemic of 2020 has entirely changed the world we live in, in many ways that we’re not yet fully aware of. But nothing has been quite as impacted as our global economy, as well as how we perceive it.

A few years ago, it was easy to view the economy as something separate, something that was related to other aspects of human existence, but only loosely. But now, after a time of great uncertainty and change, it’s become clear that only a healthy society can support a healthy economy, and vice versa. The relationship between the two is far more intricate than it may seem at first glance.

So, what if another global disaster happens? Will our economy survive it? That, of course, depends on how well we prepare for such a scenario. And embracing ESG practices seems like an excellent way to do just that. 

The idea is simple — if businesses work for the society and environment, global crises will be easier to get through or avert. At the same time, people will be able and more willing to spend money on their products and services. That way, we get a sustainable, resilient system in which different parts stick together and support each other. And such a system is bound to last longer!

Financial Sector Can No Longer Ignore ESG Demands

The financial services sector isn’t famous for its humanitarian and environmental concerns. If anything, its primary goal has always been profit, which shouldn’t be particularly surprising given its name. However, with the rise of ESG, it seems that only maximizing profit will no longer be acceptable. The world has spoken, and it wants sustainability and social equality.

A few years ago, the financial services sector could ignore the voices that demanded change. But now, that’s no longer possible — ESG has already rooted itself too deeply in the financial landscape. In fact, now it’s more profitable for this sector to show interest and care for environmental and social issues. And as ESG keeps spreading its influence, it will become virtually unavoidable.

So, like it or not, the financial sector needs to adjust to these new demands. After all, evidence shows that ESG isn’t just a passing fad — it’s here to stay.

ESG Isn’t Going Anywhere

Movements come and go, trends change all the time, and something that was popular yesterday might not be today. Even in a serious field such as economy and finance, fads do exist. So, could ESG be one too? Is it just a movement that will be around for a year or two and then disappear into oblivion?

Of course, no one can answer that with full certainty. However, even though the global pandemic exacerbated social and environmental issues ESG is trying to solve, they already existed before. And they certainly won’t disappear after the pandemic, either. So, it’s safe to say that we’ll need ESG for a long time.

But that doesn’t mean ESG won’t change or evolve into something different. Five years from now, its name might change, and its mission might expand to incorporate some new demands. That will still be ESG, though — but a new, improved version.

Thus, embracing ESG isn’t embracing a fad. It’s accepting a new era in economy and finance, which will hopefully bring about change.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.