ESG and the potential opportunity for future competitiveness
ESG and the potential opportunity for future competitiveness
14 December, 2021
Whitecap Consulting, in partnership with the Association of Financial Mutuals (AFM), recently published a report analysing the strategic landscape for financial mutual organisations in the UK. The Whitecap team is summarising the key findings in a series of blogs.
In this article, Richard Coates and Chloe Thompson of Whitecap Consulting examine the potential opportunity surrounding the ESG agenda, particularly with regards to its link to mutuality and social purpose and how financial mutuals can proactively engage with a broad spectrum of ESG activities as part of their strategic discipline. For example, reducing environment impact through energy use and CO2 footprint; leveraging social and human capital across the business model, including diversity and Inclusion; and providing leadership, governance, and risk management with current and prospective members.
This blog summarises the relevant elements of the report, which can be viewed in full here.
The primary driver behind ESG activity has to date largely been regulatory driven, rather than a response to immediate customer demand for ESG focused products.
An observation from this research is that the primary driver behind current activity appears to be regulation and the pressure to satisfy the increasing climate change disclosure and risk management requirements. The PRA has said its priorities will include three key areas: technology, diversity and inclusion and climate change. More specifically, these three focus areas aim to ensure the sustainability and competitiveness of the mutual sector through setting standards for cognitive diversity and proportionate metrics on climate change depending on the size of the organisation.
Whilst some AFM members are reporting increasing interest from members/customers in the ethics and ESG priorities of the business, the majority are not seeing an immediate customer demand for ESG focused products despite the shift towards conscious consumerism. This finding is supported by the results of the online survey conducted for this report, which revealed over half of AFM respondents agree that there is not yet a customer demand for ESG focused products, but they do believe there will be in the future.
There is a sense that AFM members could be well positioned to lead the way on the ESG agenda given the shift towards conscious consumerism, particularly after the Covid-19 pandemic.
According to PwC’s Consumer Intelligence Series survey (2021), the Covid-19 crisis has shifted consumer behaviour and enlarged the pool of conscientious consumers willing to pay more for healthier, safer, more environmentally and socially conscious products and brands. The research also revealed that consumers are sceptical about the ESG efforts of companies as they believe that consumer pressure, brand image and regulatory standards are driving companies toward ESG action rather than companies genuinely wanting to do the right thing.
Leading the way on the ESG agenda could provide a means of remaining competitive in the future for a number of AFM members, a sentiment echoed by the survey data which revealed that 73% of AFM respondents believe that ESG will help the sector to thrive in the future.
For those offering insurance and savings, ESG is becoming an increasingly prominent topic of discussion with regards to their investment activities.
For AFM members that provide insurance or savings products, the conversation around ESG appears to be primarily led by investment activity and how ESG factors are allowed for in the investment policy and implemented by asset managers. We observed a trusting relationship and open dialogue between AFM members and their asset managers. Regular reviews are a core requirement in order to ensure the investment parameters are being met and AFM members appear to show a very active interest in the activities of their investment partners.
However, there is a sense that going forward, the traditional exclusionary stance, (avoiding investing in activities that are considered unethical, such as alcohol, tobacco, gambling, adult entertainment or weapons), may not be sufficient once the pressure on organisations to be aligned with the ESG agenda starts to increase from the consumer perspective. According to PwC (2021), consumers will want to see businesses play an even bigger role in accelerating progress on ESG concerns by proactively shaping ESG best practices, not just reacting and adjusting.
There are early signs of ESG activity within the development of products and services from AFM members that offer savings and investments.
There are some signs of early activity with regards to the development of ESG focused products. For example, Shepherds Friendly has launched a Sustainable Stocks and Shares ISA as well as a Sustainable Junior ISA, while Transport Friendly has launched its World Friendly Stocks and Shares ISA.
According to research conducted by Aviva (2021), two-thirds (67%) of consumers believe that it is important to consider ESG factors before choosing where to invest their money, and sustainable bank Triodos found that 94% of 18-34-year-olds asked in a survey said they have moved, or are looking to move, their ISA holdings to an ethical provider.
Questions for CEOs and Leadership Teams
Throughout each key section of the report, a total of 32 strategic questions were posed for CEO and their leadership teams to consider and address as appropriate. The questions in relation to ESG are as follows:
1. Will your approach to investment activities going forward take an exclusionary or proactive stance considering the consumer and regulatory pressures of ESG?
2. Have you reflected on how aligned your organisation is to the ESG agenda in terms of the environmental impact, diversity & inclusion, and governance standards that are already in place?
3. Going forward, are you planning to prioritise all the three elements of ESG in balance or do you have plans to prioritise parts of the agenda?
4. Are you clear on what the ESG reporting requirements will be for your organisation and have you factored this into your strategy going forward?
5. Have you considered the potential opportunity to lead the way on the ESG agenda given its natural link to mutuality, by not only developing ESG focused products where possible, but also by taking a proactive stance to ESG investments and ensuring your organisation is well aligned to all elements of the ESG agenda?
This is the fourth in a series of blog posts that focus on key themes addressed in the research. The topics are covered in more detail in the report which you can download via the link below.
Background to report:
Analysis of the Strategic Landscape for Mutual Insurers & Friendly Societies 2021
The research underpinning the report was conducted by Whitecap Consulting in partnership with the AFM and involved a quantitative data analysis of all 43 Mutual Insurers & Friendly Societies, interviews with 31 of the CEOs, and an online survey which received a total of 61 respondents.
The project is being conducted in partnership with the AFM with support from industry sponsors including: Altus Consulting, Benenden Health, Cirencester Friendly Society, Cornish Mutual, Fidelity International, Holloway Friendly, Milliman, Oddfellows (which includes Unity Mutual), PG Mutual, Russell Investments, and Royal London Asset Management.