Interview with Matthew Smith, leading expert in ESG and Sustainable Finance
You have recently been appointed Head of ESG and Sustainable Finance in FCG Norway and joined the team on the 2nd of May. What were the key drivers behind your decision to join FCG?
It’s obvious for everyone that achieving a transition to a more sustainable economy is vital if we are to have a stable and prosperous society in the 21st century. The financial sector is a key driver in this transition and can influence both the speed and the impact of sustainable development, by defining the rules of play for companies. The role of banks and financial institutions in sustainable innovation is becoming increasingly clear. They can provide favorable lending and insurance terms as well as increased investment which in turn incentives companies to make faster changes.
“While most financial companies support increased regulation on sustainability, many are struggling with the pace and extent of changes.”
Regulators internationally have realized the potential in the financial sector and have sought to actively channel capital through increased regulation. A good example is the EU Sustainable Finance Action Plan, which aims to use the financial sector to stimulate sustainable investment by increasing transparency around sustainable products, services and financial advice.
While most financial companies support increased regulation on sustainability, many are struggling with the pace and extent of changes. This is where FCG comes in. FCG, with its dedicated finance experts in compliance, risk management and sustainability, are extremely well placed to assist companies in the transition, and I’m excited to play a role in this team.
What makes FCG different from a ESG perspective compared to other GRC consultancies in the market?
While many consultancies have specialised professionals, few have the expertise to help financial companies integrate ESG into their core processes. This is a demanding exercise and requires specialists who can understand the company in a broad sustainability perspective and then apply these insights into risk management and governance processes. At FCG we put together multi-disciplinary teams that can operationalize sustainability, reducing risk and ensuring clients meet increasing reporting expectations. In my experience, there are few sustainability consultancies that have both the sustainability and financial expertise to fully integrate ESG.
What are the most common issues financial services companies in Norway struggle with, in relation to the ESG area today?
The sheer scale of regulatory expectations is an enormous challenge. Understanding ESG issues, gathering data, quantifying risks and implementing efficient solutions are whole new arenas for most companies. Lack of in-house competency on ESG is also one of the core challenges as relevant expertise is hard to come by. As a consequence, there is often a lack of understanding as to what ESG issues are the most important and material to focus on for the company. The ESG field is huge and no company can excel in all parts of it, it is essential to focus on what’s core for your business and your key stakeholders.
“While this work is far from completed, it is positive to see the banking sector moving quickly to integrate climate and ESG risk into credit risk processes.”
Another challenge many financial companies are faced with is lack of data from client portfolios or investment portfolios to meet regulatory demands. Going forward, companies will be required to report on data sets they currently don’t have. This means they will have to ask their clients and partners to provide them with access to relevant data, a process which can be both expensive and time consuming if not done efficiently. In addition, there is little ESG integration into risk management systems, unsolved technical issues in data collation and reporting, unclear responsibilities for ESG risk management in the organization and limited understanding of how to report on ESG and what standards to use.
Can you give any examples of Best in Class ESG solutions in Norway?
There are a lot of positive initiatives going on at the moment. In the banking sector we have seen banking alliances working on alliance wide solutions for measuring and assessing climate risk in loan portfolios. While this work is far from completed, it is positive to see the banking sector moving quickly to integrate climate and ESG risk into credit risk processes.
Many large asset managers have also increased their offering of ESG funds over the past couple of years. It is now possible to invest broadly with low risk in good quality and sustainable companies in a wide range of sectors – not just windmills and solar panels. Nordic Swan funds are a good example and are proving popular in the retail market. Private Equity investors are increasingly performing comprehensive ESG due diligence and making investment decisions based on sustainability factors. Exit prices are increasingly influenced by a company’s social and sustainability profile and this is likely to result in an increased focus on ESG issues also going forward.
With the inclusion of Non-life Insurance in the EU taxonomy, many companies have realized the importance of the sector in facilitating climate adaptation. Non-life insurance companies have a vital role to play in encouraging clients to adapt their assets to a changing climate, and many are adjusting their client communication, advice and product pricing accordingly.
What should the financial sector be prepared for going forward when it comes to ESG?
First of all, there is likely to be an ongoing intensification of ESG regulation. The climate crisis is not going away and with increased negative climate effects comes an increased willingness on the behalf of regulators to take meaningful action. In addition, there will be more and stricter controls on compliance with new regulation over the next 2-3 years. Today a best effort basis is deemed sufficient in many areas, but soon this won’t be enough. Companies will be required not only to identify climate and ESG risk, but to quantify it and report precisely on how risks are being managed.
The financial sector should also be prepared that their clients will start to take advantage of increased transparency and reporting around ESG performance and move their investments into sustainable companies and projects, actively seeking out exposure to sustainable activities. Banking clients are also likely to position their activities for more favourable loan terms. Key figures like the Green Investment Ratio (GIR) for fund managers and the Green Asset Ratio (GAR) for banks have the potential to become among the most important information companies report to the market.
Finally, society will expect more from the financial sector. Increased awareness of the acute environmental crisis we are facing, coupled with a better understanding of the role of finance, will mean that financial companies in the future will need to be sustainable to be successful.