ESG challenges: talent shortage and lack of consistent standards

Just as awareness and support is accelerating for environmental, social, governance (ESG) investing, with retirement systems worldwide such as the Canadian pension system attracting attention for their strategies, an issue has arisen – a shortage of financial professionals with sustainable finance skills.

Pension funds and investment managers are among the financial services organizations affected by the talent shortage, says a recent report from Toronto Finance International (TFI) and Deloitte. But banks and insurance companies are affected as well.

How soon will they feel the effects? They already are. When it comes to investment portfolios, ESG factors offer opportunity but also risk — and the need to improve decision-making around asset allocation to ensure client success is “accelerating the need for action” in training and supporting sustainable finance professionals.

The report notes in particular a need expressed by its financial services industry respondents for financial workers with skills in ESG risk management, qualitative and quantitative analysis, and ESG auditing. But the need for skills in all areas of ESG is increasing.

Wanted: ESG and sustainable finance professionals

“ESG thinking is rapidly changing the job of financial professionals across the board,” said Kevin Hagen, Vice President of Environment, Social, & Governance (ESG) Strategy at Iron Mountain, quoted in a Harvard blog post from iits sustainable finance program. New business metrics will involve accounting for such disparate areas as environmental impact and worker pay, and new challenges in decisionmaking will require financial experts who can weigh various ESG factors.

The awareness of the need to develop sustainable finance skills currently depends on the impact a particular asset class has on the environment — for example, real estate teams in particular are more aware of the “E” in ESG than experts in other asset classes, the TFI/Deloitte report said.

But the need will expand beyond certain asset classes. “Going forward, the ability to show concrete results and precise data, while also being clear on where a company stands in addressing sustainability issues, is going to be a duty for every board, CEO, and organization, regardless of size or sector,” said Jeremy Hanson, a partner in the global CEO & Board of Directors Practice and co-lead of the global Sustainability Office at Heidrick & Struggles.

The business world is already taking note of the effects of the “E” in ESG on business. In another Deloitte report, over a quarter of executives surveyed said their organizations have felt the impact of climate change.

Additionally, where regulation around climate-related disclosure and reporting has increased — for example in Europe and the U.K. – so too has the demand for professionals with sustainable finance skills. The report says that the October 2021 Canadian Securities Administrators’ proposal for requiring consistent, comparable ESG disclosures indicates the same change is coming down the road for Canada. And in the U.S., the SEC and the DOL are proposing regulation around ESG investing as well.

Professionals most urgently needed are those with the knowledge to “integrate ESG issues into financial products and services,” according to the financial services professionals surveyed in the TFI/Deloitte report. The next most urgent need is for professionals who know “how to integrate ESG into institutional or client value propositions and how to develop a strategic approach to sustainability.”

Wanted: Consistent ESG standards and diligent investors

A strategic approach to ESG is important. It needs to become part of an organization’s core strategy not something “extra” or on the side, said Michael O’Leary, Managing Director of the investment firm Engine No.1, speaking in a recent American Sustainable Business Network webinar.

Developing a strategic approach to ESG can be challenging because of the various and different standards of reporting, although without the existing ESG standard setters, he said, “there is virtually no way to hold business leaders and companies accountable.”

What about holding CEOs and boards accountable? CEOs can (and do) say they’re going to hit a particular percentage of carbon offset, for example, in 10 years, but by then the CEO who declared that goal is gone, O’Leary pointed out. Boards have longer tenure than CEOs. But they too change.

Long-term investors are one group that can hold companies accountable. But for them to be able to assess companies, they need accurate and consistent ESG ratings and standards. The correlation between ESG raters can vary by up to 30%, according to O’Leary. With some rating systems, there might be a small company that makes an environmentally friendly device, but doesn’t have a dedicated ESG department. Their ESG rating would be lower than a company such as Phillp Morris, that sells cigarettes, he said.

One way to approach the problem is to measure the amount a company is investing in ESG, compared to the amount the company is investing in the rest of the business, he said. Even something as simple as looking to see what department the company’s ESG person is located in can reveal important information. If that person is in the marketing department, the organization may care about ESG, but only as a marketing issue, he said.

One solution is to have a chief sustainability officer report directly to the CEO,  a model that has been shown to be “the most effective way to be nimble and responsive,” according to Deloitte.

Can training financial professionals in sustainable finance lead to better, more consistent ESG standards or at least more consistent and reliable disclosures? The report doesn’t say.