The terms “ESG” and “SRI” have been increasingly gaining traction in corporate circles and among investors lately. But what do these six letters really mean? And why is it so important for professionals in the financial services industry to work them into their vocabulary and, potentially, implement them into their operations?

This guide will break down what you need to know about ESG, SRI, and their rising role within the financial services industry, including their impact on hiring practices. 

What is ESG (Environmental, Social, and Governance)?

ESG stands for environmental, social, and governance, but it’s more than just an acronym. Environmental, social, and governance are three factors that form an evaluation framework for measuring an organization’s performance in regard to environmental and social impacts, as well as potential risks, opportunities, and growth areas. 

Let’s take a quick look at each of these factors:

• Environmental: An organization’s impact on the environment, including pollution, greenhouse gas emissions, waste, the treatment of animals, and the usage of resources, water, energy, and materials. 
• Social: An organization’s efforts to ensure fair and just treatment of internal and external stakeholders, including employee well-being, supply chain management, and advocacy of marginalized groups (i.e. through diversity, equity, and inclusion).
• Governance: An organization’s leadership and management, including internal controls, alignment with stakeholder expectations, shareholder rights, and incentives, as well as transparency and accountability.

Overall, ESG frameworks demonstrate how an organization can positively impact its various shareholders, employees, customers, communities, and the environment, and provides a practical and concrete way to measure performance as it relates to each of these elements.

What is SRI (Socially Responsible Investing)?

SRI stands for socially responsible investing, a practice where investor decision-making is based on the primary goal of driving positive social and environmental change by investing in mission-aligned companies (often through the lens of ESG), with the potential for financial returns being a secondary goal of SRI.

When investors take this approach, they use an ethical framework to choose which organizations to invest in, avoiding companies that are not seen as beneficial and perhaps even harmful socially and environmentally (negative screening) and considering organizations with policies and practices that are viewed as beneficial socially and environmentally (positive screening).

Factors in the socially responsible investing decision-making process include:

• An organization’s engagement with social causes and charitable activities.
• Operational practices and goods produced by the organization and whether either could be considered socially or environmentally harmful.
• Any human rights violations committed by the organization or its supply chain.

Why are ESG and SRI Important in the Financial Services Industry? 

ESG and SRI have gained crucial importance within the financial services industry, as companies increasingly move to respond to stakeholder expectations and the shifting investment landscape. 

For hiring managers, ESG and SRI performance greatly impacts employees, both current and prospective. Studies link higher employee satisfaction with ESG performance and have proven that ESG and SRI are important factors in attracting and retaining talent, especially when it comes to younger hires. 

As ESG and SRI grows in popularity, the impacts on the hiring practices in the financial services will only continue to intensify. According to a 2022 study by the US Sustainable Investment Forum, there’s an identified $8.4 trillion in US-domiciled assets under management (AUM) using sustainable investing strategies, which represents 13% of total US assets under professional management. The study also shows that 1,359 community investing institutions and 349 money managers have incorporated ESG criteria into investment decision-making and portfolio construction across a total of $5.6 trillion in AUM, and 497 institutional investors have applied ESG incorporation practices across $6.6 trillion in AUM. Critically, the report also showed that, for the first time, climate change and carbon emissions were reported as the leading ESG criteria addressed by institutional investors, in asset-weighted terms.

As part of the 2022 Sustainability Action Report by Deloitte, 94% of financial services executives said they’re preparing for future ESG regulatory and disclosure requirements, and 49% say their board of directors has an ESG or sustainability committee. These same financial services executives identified the benefits they expect to see as a result of the rise of enhanced ESG reporting, with 55% expecting it to reduce risk and increase efficiencies and return on investment (ROI), and 52% anticipating enhanced stakeholder trust, talent attraction, and retention. Therefore, by implementing these practices and ensuring diligent reporting measures, hiring managers in the financial services industry can anticipate seeing an improvement in attracting and retaining quality candidates overall. 

The need for financial services industries to engage in ESG and SRI reporting and disclosures is also on the rise for another reason. According to the 2023 Annual Litigation Trends Survey by Norton Rose Fulbright, ESG-related litigation concerns are on the rise, with 28% of respondents saying their exposure in this area had deepened and 24% anticipating increased exposure in the upcoming year. ESG-related class action fears are also rising, with 37% of respondents viewing it as an area of future concern. 

As Rachel Roosth, Norton Rose Fulbright disputes partner says, “Across industries, our clients are feeling pressure from customers, shareholders and regulators, among others, to increase their disclosures of their ESG goals and performance. If these disclosures are perceived as false, misleading or insufficient, litigation may ensue. So, while the kinds of litigation risk may vary across industries, companies in all sectors can benefit from assessing their ESG-related litigation risks and how to mitigate them.”

Greenwashing is one reason that ESG and SRI-related litigation fears are on the rise, along with the launch of the Securities and Exchange Commission (SEC)’s Climate and ESG Task Force within the Division of Enforcement. The SEC’s rules and regulatory focus on climate-related financial disclosures are particularly significant for the financial services industry. The SEC will be watching for any potential violations, misstatements, and compliance and disclosure issues related to the ESG strategies of investment advisers and funds. 

ESG and SRI uniquely position the financial services industry to drive us all toward a more sustainable future. As other industries look to financial services for inspiration and insight into what activities are receiving financing and facilitation, the way financial services industries respond to the opportunities and challenges with ESG and SRI could be a major game-changer. 

Conclusion

Expectations for social and environmental standards continue to rise among employees, stakeholders, communities, and customers, and in conjunction, the need for transparency, accountability, and disclosures is rising to meet this growing demand. As a result, financial services industry professionals will need to determine the best way to navigate this changing landscape. ESG and SRI commitments and disclosures are a key way to lock-in the positioning needed for companies to remain agile and aligned with stakeholders, especially in the long-term; to attract and retain younger and more diverse talent and build a stronger pipeline; and to advance sustainability and transparency within the sector.

With TPD’s dedication to and understanding of the importance of ESG and SRI both in the workplace and in the world, we’re positioned to help financial services professionals find the talent, expertise, and support they need to get started on their ESG and SRI journey.