The analysis was focused on whether and how ESG considerations are already implemented in strategy, governance and remuneration with a special focus on encountered challenges and envisioned improvements.
Conduct an ESG Focus Process to analyze ESG topics and define current gaps and next steps: Only 52% of the reviewed companies disclose key ESG topics with a main focus on social (100%) and governance (85%) topics. Identifying what these topics mean for companies in the Swiss financial service industry not only in terms of external products and services but also regarding internal processes, is challenging – but essential for defining an organization’s ESG approach.
Establish an appropriate ESG Governance Network by ensuring ESG expertise and diversity: According to the interviews conducted, companies often struggle to define where ESG plays a role internally and externally and how to derive concrete strategic goals and initiatives. While the definition of a long-term ESG strategy is ideally part of the Board’s responsibilities, only 36% of the analyzed companies disclose following this practice. Approximately 28% also disclose having a separate Board committee on ESG in place. Below the Board, 52% of the companies disclosing active management of ESG topics at the executive level. To ensure the right “tone from the top”, ESG should become an anchored aspect of consideration in the regular strategic cycle enabling the successful implementation of ESG initiatives through prioritization and clear communication cascaded throughout the organization.
Follow the ESG Capability Circle approach to support employee commitment: Engaging employees at an early stage and communicating the expected benefits is key to realizing ESG strategies. By following a bottom-up approach we support the design of stakeholder engagement strategies and ensure that employees have sufficient resources and capabilities regarding ESG.
Establish an ESG Performance Map for tracking and reporting: Investors and proxy advisors are increasingly scrutinizing remuneration systems for the reflection of ESG topics as a proxy to how credible ESG efforts are. 52% of the banks and insurers in the HCM Top 100 Switzerland data set disclose a link of ESG initiatives to variable pay. Social topics, and especially topics related to employees, account for the largest share. Breaking down ESG topics into yearly measurable KPIs is essential for setting the right tone from the top and ensuring appropriate priorities. Clear tracking and reporting also supports credibility and reputation.
Financial service companies are increasingly becoming aware of potential regulatory changes (e.g. the EU action plan on sustainable finance1 ) on ESG, i.e. environmental, social and governance topics. Also, the needs of customers are changing which have been further supported by the heighted ESG focus of global investors such as BlackRock2. The increase in investors’ attention on ESG has also been confirmed in our recently published investor study together with our partners in the Global Governance and Executive Compensation Group (GECN Group)3 . Last but not least, the recent COVID-19 pandemic has further shown how important long-term, sustainable business strategies can be.
While the financial service industry is typically quite advanced when it comes to regulatory topics, as well as compliance and governance, those same companies are often unsure about how to anchor ESG topics in their respective strategy, governance and remuneration practices. Based on this observation, the question arises as to how your organization can warrant the achievement of strategic ESG goals? Are Board of Directors (Boards) and Executive Management really able to independently form an opinion on ESG topics? And lastly, how can your progress be measured and incentivized?
Methodology applied HCM International Ltd. (HCM) has conducted an explorative study to analyze the status-quo regarding ESG integration in the banking and insurance industry in Switzerland. To structure the findings, the HCM framework “4 Action Points for Decision Makers” was used (see chart below). The analysis focused on whether and how the top 25 companies in the SPI Financial Index4 already implement ESG considerations in strategy, governance and remuneration with a special focus on encountered challenges and envisioned improvements. The quantitative analysis was further supported by personal interviews conducted with selected CEOs and Chairpersons of Swiss financial service companies in order to substantiate publicly available data with insights into actual company practices and processes.
1. Define your key ESG topics 6 Anonymized interview feedback from interviews conducted with selected CEOs and Chairpersons of Swiss financial service companies. Similar to the struggle in other industries, one of the key challenges that ESG-related initiatives face in the financial service industry is the diverse definition of ESG. In the interviews conducted, these challenges were often perceived to be based on a “lack of ESG code of conducts” or “different level of strictness” in the pursuit of such initiatives in a “very broad topic”6. Therefore, defining your organization’s key ESG topics by means of a materiality assessment is a helpful step based on the interview feedback received.
Such assessments are based on internal and external stakeholder feedback and vary depending on industry, business model, strategy and culture. For most companies, materiality assessments form a key step towards the definition of focus topics as well as finding a common language. However, of the financial service companies analyzed in this review, only 52% publish a materiality assessment in which key ESG topics are defined.
Of the reviewed companies that disclose such an assessment, all of them pay tribute to social topics such as societally relevant diversity topics. Governance topics are also rather common with 85%. Contrarily, environmental topics are assessed as
