Strategy& is PwC’s global strategy consulting business which, among other things, helps its clients respond to the challenges, risks and opportunities posed by ESG. Strategy& Partner Andrew McDowell talks about greenwashing, new innovations and why ESG might not be around in the future anymore.
Why are ESG standards being considered as the opportunity of the century for the financial sector?
On the one hand, it’s because the financial sector is going to have to finance the massive amount of capital investment that will be required to deliver on net-zero and the other UN Sustainable Development Goals. By some estimates, about €80 trillion will have to be spent on global infrastructure alone to achieve the latter. From a pure business perspective, this is an enormous opportunity for the finance sector.
From a broader social legitimacy perspective, it also provides the financial sector with the opportunity to prove its social value-added, which has come under fire since the 2008 financial crisis. This is an opportunity for the financial sector to show that it can allocate capital properly, into the right places and into the right investments from a social, environmental and governmental perspective. So I think also from a kind of rehabilitation perspective, it is a big opportunity.
ESG standards have gone from a mere set of criteria to almost an entire approach to doing business. What changes has this approach triggered in the financial sector?
Although ESG has been around for a few decades now, I think what’s changed is that it’s really gone mainstream. If you take a historical perspective, what you see is that finance has evolved from the 19th century, where it was all about returns, and the 20th century where it was all about the relationship between risk and returns, to today where it has added the dimension of ESG as well as financial risk and returns.
And it’s not just about integrating the impact of ESG risks – such as climate change and climate policies – into the design of financial products, but also measuring and disclosing the impact of financial products on the sustainability of the world we live in – from an environmental and social perspective. This is the concept of “double materiality” and is a fundamental shift for a financial industry built on two factors risk and return.
There has been a lot of buzz around ESG criteria and their potential to do good. But there appears to still be plenty of room for abuse and greenwashing. How much of a concern is that?
Growing environmental and social consciousness, particularly among the younger generation, has made ESG a competitive factor in the marketplace, and an increasing number of financial products are incorporating claims about their positive ESG impact. With the increasing disclosure requirements, financial services players know there is no hiding place anymore.
But talking to directors and senior managers of financial institutions, one of their top concerns is being accused of greenwashing and mis-selling products to their clients. So a lot of boards are very concerned about making sure the ESG claims they make stand up to scrutiny. The good news is that – through the European Green Deal – the EU is leading the way to provide the financial services sector with a common green classification and disclosure system. Notwithstanding the costs of putting in place the necessary data collection, measurement, reporting and disclosure systems, my sense is that the financial services sector welcomes the greater ESG clarity and standardisation now available.
“In 10 years, I hope we will not even refer to ESG anymore because it will have become embedded in normal finance.”
Andrew McDowell, Strategy& Partner
So how does Strategy& help its clients in avoiding falling victim to claims of greenwashing?
The greater social and political focus on sustainability – and particularly on climate – indeed creates risks for the financial services sector, but even more opportunities. The opportunity to finance and insure the massive investments in the assets, the technologies and the business models needed to deliver on net zero and other UN Sustainable Development Goals. This will require significantly high levels of business and public capital formation that has occurred in recent decades.
In this context, we’re working with financial institutions all the way from strategy through to execution in the space of ESG. We help them identify what issues are material for them as financial institutions. In other words, what are the most likely contributions that they can make to ESG from the nature of the business that they do?
We also help them find the most likely risks their existing business models face in terms of areas where they could be accused of damaging various ESG objectives and sustainable development goals.
Many of our clients are asset managers who are now subject to disclosure regulations about the environmental claims of their products. While many of them are aware of these regulations, they aren’t fully aware of the implications of the regulations and the opportunities to design new products for a new generation of ESG conscious investors.
What innovations are being triggered by ESG?
To get to net-zero by 2050, clearly we need new types of energy solutions. According to the International Energy Agency, about half of what we need to get to net-zero can be delivered by the deployment of existing technologies. But about half of that will require technological innovation, particularly in spaces like, you know, batteries, the hydrogen value chain and carbon capture and storage. This creates a challenge for the financial services sector to upskill itself to understand the risks and opportunities associated with these technologies.
I think the circular economy is also going to trigger massive amounts of innovation. Witness the recent UN resolution to move to a legally binding agreement to reduce plastic pollution. This will radically change the business models around plastics which is going to require a lot of new technologies.
What changes have ESG standards led to both internally and externally at PwC?
Internally, we are working intensively on our own sustainability agenda built of four pillars – people, prosperity, planet and governance – all designed to integrate sustainability into overall business strategy. Within the “planet” pillar, we aim to become net-zero by 2030, including through a 50% reduction in our gross emissions compared with 2019.
Our sustainability agenda is completely reforming our annual reporting which will – in time – put our ESG reporting on the same footing as our financial reporting, including limited external assurance.
In terms of our product offering, ESG is going to become increasingly important. It is already a major part of our advisory business, but will also increasingly be a feature of our assurance and tax businesses. ESG disclosures by large corporates – such as the alignment of their businesses with the EU Sustainable Finance Taxonomy – will be subject to external assurance. An increasing number of countries – including Luxembourg – are also integrating green incentives into their tax systems.
What do you think the future of ESG will look like?
Climate is currently the big ESG topic in the EU, but will probably also be joined over time by other environmental topics such as the circular economy and biodiversity. In the USA, there will also be a greater focus on social topics within ESG, such as diversity and inclusion.
But in 10 years, I hope we will not even refer to ESG anymore because it will have become embedded in normal finance. If you’re not green, you may not be in business anymore. In some ways, I think the vocabulary may change because these standards will become fully integrated into the sector.
Editor’s note: This article is brought to your by PwC Luxembourg and reflects only the opinion of the author.
This article was first published in the Silicon Luxembourg magazine. Read the full digital version of the magazine on our website, here. You can also choose to receive a hard copy at the office or at home. Subscribe now.
