What is ESG and why is it important for the financial world?
ESG stands for Environmental, Social and Governance. These three dimensions stand for environmental, social and corporate responsibility.
Definition of the three ESG dimensions:
- Environmental: Resource management, climate protection, waste management, water consumption and biodiversity.
- Social: Employee rights, diversity, health and safety in the workplace, community engagement and human rights.
- Governance: Business ethics, transparency, board composition, compliance and anti-corruption.
Companies that successfully integrate ESG criteria not only benefit from a better image, but also from long-term financial success. Bernhard Kienberger, management consultant at the Terra Institute, explains:
“Corporate figures tell us whether a company is healthy. However, the figures for the planet are alarming - from species extinction to global warming. It is crucial that CFOs and companies pay attention not only to financial but also to non-financial key figures. The impact on company value is not insignificant. The context (environment, political stability, security, risk situation, predictability) of a company contributes significantly to its enterprise value (via the EBITDA multiple) and is therefore also relevant for financially oriented people when making decisions.”
ESG and the financial sector have found increasing points of contact in recent years, as ESG criteria are playing an increasingly important role in the decision-making of investors, banks and other financial institutions. The most important overlaps include:
- ESG risk management: ESG factors are increasingly seen as material risks that can impact the financial performance of companies. For example, environmental disasters, social unrest or poor corporate governance can lead to significant financial losses. Banks and investors are therefore taking ESG criteria into account in order to better manage such risks.
- Regulation and compliance: Regulatory authorities are increasingly demanding transparency with regard to ESG practices. Financial institutions are required to report on ESG-related risks and opportunities, which reinforces the integration of ESG into their processes. The cost of ESG compliance is rising, underlining the importance of a strategic approach.
- Lending and financing: Banks assess the ESG performance of companies before granting loans. Companies with high ESG ratings often receive better credit terms, while those with poor ratings may have difficulty obtaining capital. Sustainability-related investments and financing play a key role here.
- Customer and reputation management: Financial institutions are responding to growing pressure from customers who increasingly value sustainable and ethical investment practices. Good ESG management can also strengthen the reputation of a financial institution.
Checklist: Why financial experts should integrate ESG criteria
✓ Long-term value enhancement: Integration of ESG can increase company value.
✓ Regulatory compliance: Preparing for upcoming legal requirements and considering the costs of ESG compliance.
✓ ESG risk management: Minimizing risks through sustainable business practices.
✓ Reputation and image: Improving public image through sustainable action.
✓ Employee engagement: Increasing employee satisfaction through social responsibility.
What gaps still exist between ESG and the financial world?
In the financial world, analytical skills and strategic thinking are in demand - and this also applies to the ESG sector. However, although these skills are available and the need is recognized, there is often a lack of sufficient knowledge to implement ESG effectively.
The 4 biggest gaps:
- Knowledge and understanding: Many finance professionals have heard of ESG but don't know exactly what it means or how to implement it.
- Measurability: Despite the measurable nature of ESG, there is often a lack of clear KPIs and an understanding of how it can be integrated into day-to-day business.
- Integration into the corporate strategy: ESG must be seen as an integral part of the corporate strategy, not just an add-on.
- Cultural change: A rethink is necessary to anchor ESG as a core value in the corporate culture.
Checklist: What is missing for the effective integration of ESG
✓ Education and training: Building ESG knowledge and skills.
✓ Development of KPIs: Establishing clear metrics to measure ESG success.
✓ Strategic planning: Integration of ESG into the long-term corporate strategy.
✓ Communication: Promoting a corporate culture that supports ESG.
What can companies and CFOs do with regard to ESG?
CFOs can play a decisive role in the implementation and integration of ESG in the company, as Bernhard Kienberger also confirms:
“CFOs are dealing with the two major transformation topics of AI and sustainability. While AI is often difficult to measure, ESG offers clear metrics and measurable goals that make it easier to monitor and manage success.”
Here are some concrete measures for the three ESG areas:
Environmental:
1. Sustainable financing strategies: The CFO can use green financial instruments such as green bonds, sustainability-linked loans or other sustainable financing methods to support environmentally friendly projects.
2. CO2 accounting and reduction targets: Implement systems to measure the company's carbon footprint and set targets to reduce greenhouse gas emissions. The CFO can monitor the financial impact of these measures and ensure that they are anchored in the company's objectives.
3. Promote a circular economy: Implement measures that increase resource efficiency, such as reducing waste, recycling and the use of secondary raw materials.
4. Promote investment in sustainable projects: CFOs can provide capital for sustainable investments, such as green technologies or energy efficiency measures.
Social:
5. Diversity and inclusion: The CFO may allocate budgets and resources to diversity and inclusion initiatives, such as equal opportunity and pay programs, support for underrepresented groups, and training.
6. Employee wellbeing and engagement: Implement programs to improve employee wellbeing, including health and safety initiatives, work-life balance measures and training programs.
7. Community engagement and corporate social responsibility (CSR): Support initiatives and partnerships that strengthen the company's corporate citizenship, such as donation programs, volunteering and supporting local communities.
8. Supply chain monitoring: Establish policies and systems to monitor social standards in the supply chain to ensure that suppliers comply with fair working conditions.
Governance (corporate management):
9. Integrating ESG into financial reporting: CFOs can integrate ESG metrics into regular financial reporting. This includes the inclusion of ESG data in annual reports, quarterly reports and investor presentations to ensure transparency to stakeholders.
10. Incentivize ESG performance: CFOs can integrate ESG targets into the remuneration structure of management and employees. This could mean linking a portion of bonuses to the achievement of certain ESG metrics to create a strong motivation to improve ESG performance.
11. Integrate ESG into the corporate strategy: The CFO can ensure that ESG criteria are integrated into the company's long-term strategy and decision-making, including capital allocation and the evaluation of investment opportunities.
12. Improve stakeholder engagement and communication: CFOs should actively seek dialog with investors, customers and other stakeholders about the company's ESG strategy. Transparent communication about the progress and challenges in implementing ESG initiatives strengthens the company's trust and reputation.
Potential of ESG: Job enrichment in the financial sector
The integration of ESG into the world of finance offers enormous opportunities for job enrichment and the further development of careers in the financial sector.
Advantages of ESG for financial professions:
- Job enrichment: Finance professionals can expand their role by focusing on ESG, making their work more varied and fulfilling.
- New career paths: Sustainability-related investing and finance create new career paths and opportunities for specialization, particularly in areas such as sustainability reporting and ESG analysis.
- Strengthening intrinsic motivation: Employees who are committed to sustainability often find more meaning and fulfillment in their work.
Bernhard Kienberger explains that ESG offers an opportunity for job enrichment:
“If you only do accounting or controlling, it can get boring in the long run. The addition of sustainability offers new points of focus and increases job satisfaction. Financial security is important, but if the world is broken, future generations won't benefit from it. That's why it's important to also consider the world we leave behind.”
Want to find out more about the new ESG job profiles? Take a look at this article.
ESG implementation pays off
Despite all the challenges that the integration of ESG entails, it should also be seen as an opportunity to turn a company into a modern enterprise of the 21st century.
Some companies are already pioneers in the integration of ESG and show how it can be successfully implemented. For example, a transport company in Vienna relies exclusively on e-trucks for its deliveries in order to reduce its CO2 footprint. Or companies in the automotive industry report the CO2 footprint of each product. Those who cannot do this are left behind.
Kienberger points out that companies that neglect ESG risk being left behind:
“Those who don't have their finger on the pulse here miss the opportunity to have everything prepared and drop out. Once you're out with the customer, you can't get back in. ESG is a stakeholder issue and affects the most important stakeholders - employees and customers.”
Our conclusion
ESG is a key topic that is changing the financial world for good. Finance professionals, and CFOs in particular, must see ESG as an integral part of their corporate strategy and actively work to integrate ESG criteria. This is not just a question of short-term success, but also of responsibility towards future generations and the long-term increase in the value of the company. The time to act is now - for the environment, society and the company's success.
