Environmental, social and governance (ESG) and human resources (HR) leaders from a sample of financial institutions and EY’s People Advisory Services and Financial Services Risk Management groups joined together to discuss the workforce implications of an increasingly important and timely ESG agenda within the financial services industry. This article reflects that conversation.
ESG and the “draw for talent”
The “Great Resignation,” a term coined to describe the increased levels of workforce attrition observed over the course of the COVID-19 pandemic, is a reflection of workers re-evaluating their priorities and questioning who they will work for and when, where and how they will work. With this shift, financial institutions (FIs) are recognizing that employees have a range of employment options and are taking actions to create flexible, safe, diverse and sustainable work environments. As such, the ESG movement has become increasingly important in an FI’s efforts to attract and retain top talent by demonstrating an authentic commitment to purpose through related actions, such as environmental protection, social justice and ethical operations.
Generational shifts and embracing ESG
Research indicates that millennials and the Gen Z populace will comprise most of the workforce by 2030, and whether influenced by growing up with climate and social justice issues in the news or other factors, these employees are often aligned to the idea of a more sustainable, equitable and just world. In turn, it is conceivable that employees in this category will expect their employers to demonstrate similar awareness and values. ESG provides FIs with the means for doing so and, as such, there is a growing prevalence of ESG principles found in talent management programs. For example:
- Some FIs are highlighting the “social” aspect of ESG by disclosing diversity, equity and inclusion (DEI) initiatives via public channels.
- Increasingly, FIs are denying services and investment opportunities to clients that fail to meet certain ESG criteria, including gender representation on boards and reduced carbon emissions.
- Some FIs are highlighting sustainability goals, environmental programs, employee resources groups, wellness programs and flexibility policies as part of their hiring and employee engagement strategies.
- There is a growing commitment to include DEI targets within executive performance management and compensation frameworks across the sector.
Integrating ESG
But these approaches are still scattershot throughout the financial services industry, and to fully embrace ESG as a strategic business imperative and incorporate it into corporate governance and culture, FIs need to understand that ESG is complex, with many players and moving parts, and that there is no one-size-fits-all integration strategy.
Some companies have made progress integrating ESG into their business strategies and risk management frameworks with full support of their leadership and boards, while others are just beginning to identify how ESG fits into their overall business strategy and operations. To further complicate matters, the industry is still in the process of defining ESG measurement and reporting requirements, with few companies having obtained independent review or third-party attestation of their sustainability metrics. Regulatory developments, although in the early stages, will pose their challenges but may help to establish some common guidance on these topics across the sector.
Helping leaders embrace ESG
Increasing ESG literacy across the workforce starts with a top-down approach, starting with the board. Board education and training programs have been developed in some FIs to help the board understand ESG-related insights that may affect the business. As a next step, this training can be cascaded through the organization to start embedding climate and social considerations into each employee’s day-to-day routine.
The role of leaders is critical in building ESG capabilities across the workforce, particularly as it relates to leading by example and encouraging and supporting ESG initiatives, such as supplier diversity programs. Such programs can increase the representation of minority- and diverse-owned businesses within the landscape of FI vendors — signaling to current and prospective employees that the company takes ESG seriously and has moved beyond publishing broad public statements to committing to and embedding ESG throughout the entire organization and supply chain.
Increasing ESG fluency
A foundational step in building sustainable ESG capabilities requires establishing a basic fluency across the company. This involves implementation of a “two-tracks” training strategy, where a segment of the workforce is subject to extensive technical training, while most others are limited to the foundational basics of ESG. This is because different stakeholder groups across the company will engage differently with ESG concepts. For example, professionals driving the ESG strategy and engaging with technical topics will need to have much deeper knowledge of relevant concepts as compared to the majority of employees across the company who require a cursory knowledge of ESG concepts to perform their job functions.
Besides increasing fluency, FIs will not be successful in advancing their ESG strategies if they lack a sustainable pipeline of talent with relevant ESG skills. This is a challenge given the scarcity of mature ESG talent in the current labor market. The need for professionals with a wide range of skills and knowledge sets required for an ESG program, in areas such as climate risk, sustainable finance, DEI, wellness, investment management, procurement, biology, agriculture, compliance, branding, governance, marketing, digital and much more, also poses a challenge.
In response, FIs may consider taking advantage of skill set adjacencies, which involves identifying employees with skills that are relevant to the ESG agenda, but not exact, and providing them with targeted upskilling, coaching and supportive team constructs to help them perform ESG roles and build more specific ESG skills; for example, by helping risk managers or finance specialists transition into climate risk manager or sustainable finance specialist roles through appropriate learning, supervision and on-the-job work experiences.
Financial inclusion
Financial inclusion is central to the “S” in ESG as it affects the financial services sector. The COVID-19 pandemic has increased the urgency around financial inclusion given its ability to improve people’s lives, reduce poverty and advance economic development through equitable access to useful and affordable financial products and services that underserved populations need. Increasingly, FIs are looking at the workforce implications of financial inclusion and recognizing that they need a workforce that represents underserved populations in order to move the needle, which includes increased representation of workers from different racial and socioeconomic backgrounds, among other factors.
Increasingly, regulators are expecting measurable action and disclosures around financial inclusion from banks, asset managers and insurance companies. The SEC has made it clear that it is going to introduce a proposal around workforce diversity disclosures, giving the organization insight into financial services companies’ diversity makeup and how this diversity impacts the products and services the FIs are developing and implementing to support underserved communities.
ESG metrics
As FIs face pressure from investors, customers, shareholders and employees to integrate ESG throughout their corporate fiber, the subject of measurement becomes increasingly important. The lack of quality data and standardized methodologies are some of the biggest challenges in establishing an effective approach to measuring progress against the ESG strategy. In the near term, regulatory guidance is expected that will be helpful in establishing common standards for measuring, with authenticity and credibility, how an FI is progressing against its ESG aspirations. In the meantime, FIs may benefit from strengthening data governance protocols around workforce data, such as diversity status (e.g., ethnicity, disability, sexual orientation), to uplift the quality of DEI metrics disclosures.
The final takeaway
Integrating ESG within an FI’s business strategy has become an imperative and a baseline expectation of investors, customers, regulators and employees. In addition to advancing community outcomes, such as environmental protection, social justice and ethical operations, the ability to deliver on ESG aspirations can serve as a helpful tool in attracting and retaining top talent, particularly among emerging generations in the workforce who connect, deeply, with ideals around sustainability, equity and justice. In response, FIs are looking at opportunities to strengthen their commitments to ESG within the talent brand, as well as build a pipeline of talent needed to sustain the ESG program over time via a range of levers, including upskilling, diversity hiring and the use of skill adjacencies.
