Why Financial Institutions Need to Engage in ESG

As the world becomes increasingly aware of the climate crisis, social inequalities, and corporate governance issues, consumers are demanding more responsibility from businesses, including banks and financial institutions. This shift didn't happen overnight, but the evolution of consumer attitudes towards environmental, social, and governance (ESG) principles, accelerated by global challenges like COVID-19, is forcing industries to reimagine their impact on the world.

Evolving consumer expectations

Consumers have always prioritized convenience, service quality, and product offerings when selecting a bank or financial institution. However, a growing awareness of social and environmental issues has transformed this rationale. Consumers today are looking beyond products and interest rates; they are scrutinizing how financial institutions align with their personal values around sustainability, social justice, and ethical governance. The data shows that 40% of US households would sacrifice some return to invest in companies that reflect their values.

The rise of social media, instant access to information, and global movements like Extinction Rebellion, Just Stop Oil, etc. have amplified this shift. Younger generations, particularly those under 40, are leading the charge, placing pressure on businesses to not only serve their financial needs but also contribute meaningfully to societal challenges. For these consumers, it is no longer enough for a bank to avoid harmful practices – banks must now actively engage in sustainable and responsible initiatives to earn their trust. The data shows that 42% of US households would only do business with financial institutions that they believe are committed to improving social issues.

The banking sector's response to ESG

Recognizing this shift, many financial institutions in the US have started embracing ESG principles, although the degree of commitment varies. Large banks, such as JPMorgan Chase and Bank of America, have begun implementing sustainability goals, with some pledging to achieve net-zero carbon emissions within their lending portfolios by 2050. These moves signal that ESG has become a core consideration, not just a marketing tool. Banks are investing in renewable energy projects, issuing green bonds, and offering products like ESG-focused investment funds to cater to this evolving consumer base.

The investment sector's response to ESG

Investment firms are also adapting by offering their clients portfolios that prioritize ESG-conscious companies. BlackRock, for example, has publicly committed to making sustainability a core component of its investment strategy. This is not just about meeting regulatory requirements but also about attracting a consumer base that is increasingly selective about where their money is invested.

However, while some financial institutions have made strides in embracing ESG principles, others have been slower to act. For many, the process of integrating these considerations into their business model requires a significant cultural and operational shift, which can take time to realize.

The impact of COVID-19 on ESG initiatives

The COVID-19 pandemic threw a wrench in the momentum for many businesses looking to invest in and roll out ESG initiatives. With the economy in crisis mode, many companies diverted resources toward more immediate concerns, such as maintaining liquidity, preserving jobs, and meeting short-term financial obligations. This resulted in delays in launching or expanding ESG-related programs.

In the banking and finance sectors, the focus shifted to stabilizing operations and responding to customer needs during unprecedented financial uncertainty. Banks had to prioritize lending and support for small businesses and vulnerable communities affected by the pandemic, while ESG initiatives often took a backseat. The pandemic also reinforced the importance of ESG. It exposed systemic vulnerabilities, from economic inequalities to the need for stronger corporate governance, prompting a reevaluation of long-term strategies. As the immediate crisis subsides, businesses are finding that ESG commitments are more important than ever in building resilience for future challenges.

Like businesses, consumers’ attentions were also redirected and focused on immediate needs such as healthcare, employment, and financial stability. The emphasis on ESG temporarily decreased, as consumers' attention was drawn toward personal survival rather than the ethical and sustainable practices of corporations. This shift in focus highlights the fragility of ESG priorities during times of crisis but also sets the stage for a renewed and stronger commitment post-pandemic.

ESG across industries

The banking sector is not the only industry where ESG has become a significant driver of consumer decision-making. Across sectors such as retail, technology, and automotive, ESG has become a vital part of brand identity and product development. For example, electric vehicle manufacturers like Tesla have positioned themselves as leaders in sustainability, making environmental responsibility central to their value proposition.

In retail, companies like Patagonia and Nike have embraced sustainability and ethical labor practices, responding to consumers who are willing to pay more for eco-friendly and socially responsible products. The trend is clear: consumers are increasingly expecting companies to align with their values, and this mindset carries over when choosing financial products or providers.

How financial institutions can better support ESG and social initiatives

For banks and financial institutions, the path forward is clear: engaging deeply with ESG principles is no longer optional. Those that fail to prioritize these areas risk losing relevance, particularly among younger, values-driven consumers. So how can financial institutions better support ESG, local communities, and social initiatives?

1. Product innovation: Develop products and services that support ESG goals, such as green bonds, sustainability-linked loans, and ESG-focused mutual funds. By aligning their offerings with consumer values, banks can attract customers who are committed to social and environmental change.

2. Community investment: Support local communities through targeted investments in small businesses, affordable housing, and renewable energy projects. This not only builds goodwill but also strengthens long-term customer relationships.

3. Transparency and accountability: Consumers demand authenticity. Financial institutions should provide clear and transparent reporting on their ESG commitments, offering measurable goals and progress updates. Establishing trust is key to maintaining consumer loyalty.

4. Employee engagement: Foster a culture of social responsibility within the organization by encouraging employees to participate in ESG-related initiatives, from volunteer programs to corporate sustainability efforts. Employees who feel connected to these values are more likely to be engaged and contribute to the company's long-term success.

Why financial institutions need to engage in ESG

The financial sector wields significant influence over the broader economy and has the ability to drive meaningful change. By embracing ESG principles, banks and financial institutions not only meet consumer expectations but also contribute to solving some of the most pressing global challenges, from climate change to social inequality.

As consumers continue to hold businesses to higher standards, the financial sector must recognize that its role is evolving. ESG is no longer a "nice to have" – it has become imperative to long-term success. Financial institutions that embrace this reality will not only meet the demands of today’s consumers but also help shape a more sustainable, equitable future.