Jens Peers, Chief Investment Officer of Sustainable Equities and Fixed Income at Mirova1, says he is witnessing more and more finance firms making environmental, social, and governance (ESG) criteria and sustainability considerations an integral component of how they do business. “I really think finance will continue to be remade by ESG trends as companies pursue long-term growth and have a desire to make positive long-term impact on society,” said Peers.
Technological breakthroughs in computing power, digital connectivity, data security and artificial intelligence have led to groundbreaking changes in the financial industry. Companies like Visa Inc. and MasterCard Inc. are working to expand payment systems in emerging markets where demand for business-to-business and consumer-to-business transactions is increasing, often in regions with limited access to traditional brick-and-mortar banks.
“Transactions of all kinds are being dematerialized for today’s digital, mobile world,” said Peers, adding “This trend is likely to help facilitate business growth and activity across all sectors of the global economy – in both developed and emerging markets.”
That said, growth in the number and scope of business transactions worldwide will most likely depend on robust security systems. Visa Inc. is one firm heavily focused on improving payment security and fraud protection for merchants, consumers, banks, and governments. “Sometimes people ask me ‘What’s so sustainable about Visa?’ Well, we think this is an example of a company that is going to drive electronic payments and inform the broader organization of the global economy,” said Peers.
Peers points out that several of the trends and business practices under way in finance are aligned with the United Nations’ Sustainable Development Goals. The UN’s 17 goals were established in 2015 to help drive economic action over the next 15 years in areas of importance for humanity and the planet. Peers and the research analysts at Mirova use the UN Sustainable Development Goals (SDG) as a guideline when assessing the sustainability of companies.
Traditional financial sector embracing sustainability
The CEO of Mirova, Philippe Zaouati, believes the integration of sustainable practices across traditional financial sector businesses, such as banks, insurers and investment managers, is well under way. Not only are they leveraging new technologies and improving energy efficiency, but many are also focusing on sustainability when it comes to their products and services.
“Many of these businesses are taking steps to become more sustainable and responsible, and they will ultimately play a very large role in financing activities related to the SDGs and the transition to a low carbon economy,” said Zaouati. “Finance is not neutral. It is a very important tool that we have to use in order to face these issues. And so it's exactly what we are doing at Mirova, and also, we try to help on the regulatory side. For example, I was a member of the High Level Expert Group on Sustainable Finance for the European Commission. And this is something that we are pushing forward very much.”
Allianz, a German multi-line insurance company whose main activities include property & casualty insurance, life & health insurance products, and asset management, is an example of a financial firm whose products and services provide sustainability opportunities. This includes microinsurance products, or coverage for low-income households and individuals, which the firm provides to about 60 million people. In an effort to contribute to a low carbon economy, the firm has also committed to increasing investment in renewable energies.
Cloud (mortgage) banking
Mortgage banking is another branch of financial services that is undergoing significant changes in the name of business sustainability and taking on new markets. Ellie Mae Inc., a leading cloud-based software provider, is helping the mortgage finance sector become much more efficient. The company’s technology solutions enable lenders to originate more loans, reduce origination costs, and shorten the time to close.
New ESG paradigms
Beyond specific changes to their business models and practices, companies are taking additional steps to improve their long-term competitiveness and sustainability. For instance, MasterCard is working to increase the energy efficiency of its data centers.
Overall, Mirova’s Jens Peers believes financial firms embracing sustainability and ESG will fare significantly better in the future than those who do not. “It’s going to be a lot clearer over time what companies are adjusting to new paradigms and what companies will lose out as they fail to adjust.”
Microinsurance is a financial arrangement to protect low-income people against specific perils in exchange for regular premium payments proportionate to the likelihood and cost of the risk involved.
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ESG investing focuses on investments in companies that demonstrate adherence to environmental, social and governance (ESG) practices, therefore the universe of investments may be reduced. An ESG strategy may sell a security when it could be disadvantageous to do so or forgo opportunities in certain companies, industries, sectors or countries. This could have a negative impact on performance depending on whether such investments are in or out of favor.