Short-termism driving many net zero strategies, Mayer Brown study reveals
London - Nearly three-quarters of business leaders in the financial services sector believe that companies must embrace environmental, social, and governance (ESG) initiatives if they are to maintain relevance in the future. However, a new survey by leading international law firm Mayer Brown reveals a widespread lack of preparedness and short-termism among financial services leaders. Although decarbonisation is a pressing issue at the top of the business agenda, only 18% of financial institutions and 27% of investment firms have a net zero transformation strategy that looks beyond the next 12 months.
Tim Baines, a partner at Mayer Brown, said: “A move away from short-termism has been at the core of the ESG movement. On the one hand, there is pressure for businesses to focus on short-term financial returns and profit maximization. On the other hand, there is a growing recognition of the importance of adopting a longer-term perspective that considers social and environmental factors. It is a balancing act that, owing to a number of compounding issues, is making it quite difficult for some businesses to effectively implement their long-term environmental and net-zero strategies.”
The study also cites the cost of transitioning to net zero as a significant obstacle to business transformation and longer-term strategies as investment firms particularly (over financial institutions) worry about funding prolonged and expensive plans. Regulation of the financial services sector in relation to sustainability and other ESG disclosures is an expanding area with competing obligations and inconsistent disclosure rules. Mayer Brown’s report reveals that, as costs rise and access to capital becomes more challenging, business leaders are increasingly looking towards alternative sources of innovative finance to facilitate the transition to net zero.
Peter Pears, a partner at Mayer Brown, commented: “We continue to see more innovative and imaginative forms of financing for the transition to net zero. As sustainable finance has grown it has matured – companies and their advisers are often looking to ‘push the envelope’ in terms of sustainability related structures and sources of capital to access the funding they need. In particular, transition finance, as opposed to pure play green financing, is something we are seeing more and more of.”
As companies face the financial challenges and complexities of this transition, many are also turning to M&A to accelerate their ESG progress and enhance their environmental credentials more quickly. The report found that 71% of financial institutions and 79% of investment firms view M&A as a way of supercharging organizational transformation over the next few years.
Despite the challenges, ESG has become a critical consideration for businesses. Mayer Brown’s study reveals that financial institution leaders prioritize sustainability considerations as the top force impacting their organizations over the next three years, while investment firm leaders identify the cost of transitioning to net zero as a key factor in their transformation plans.
Financial services leaders also see the priority of a sustainability focus, in order to be a “future-ready” financial services firm: 81% of investment firms and 67% of financial institution leaders believe that companies must embrace sustainability if they are to thrive in the next economy and manage short-term ESG backlash to secure long-term positive stakeholder/shareholder engagement.
