Why Finance Leaders Can't Afford To Ignore ESG

The recent and rapid expansion of ESG investing has resulted in ESG assets worldwide now exceeding ￡20 trillion. This has been sparked by a growing investor demand for ethical investment options, more understanding of the financial materiality of ESG issues and the fact that quickly mobilising private resources is necessary to address the complex challenges ESG continually raises.

The noticeable shifts in investor preferences, particularly concerning younger generations who prioritise sustainability, has been a long-lasting driver here. Investors have also started to include more ESG criteria into their investment mandates; engaging with companies that show a strong focus on these particular issues.

This presents both challenges and opportunities. While the demand for ESG skills and expertise has never been higher, the supply of qualified candidates stagnates shockingly behind the soaring demand. By developing skilled, experienced candidates with the knowledge to effectively integrate ESG considerations into financial analysis and decision making, businesses can effectively drive long-term success while also contributing to more sustainable and equitable goals.

In this article, we'll explore the main factors contributing to the rise of ESG investing and discuss the unavoidable importance of adding expertise into sustainable finance and ESG integration for businesses seeking to succeed in responsible investing.

The Mainstreaming of ESG and New Regulations

ESG considerations have clearly become an integral part of investment strategies, as studies have shown that 90% of finance controllers say sustainable finance is now a core aspect of what they do – reflecting the strong focus on incorporating ESG factors into investment decision-making.

This is further highlighted by a recognition that ESG factors have an impact on a company's long-term financial performance. Issues like climate risk, human capital management and corporate governance etc. are seen as fundamental aspects to consider when assessing an investment's risk and return potential. Put another way, while ESG is seen societally as the 'right thing to do', it's also a necessary step for CFOs in making well-informed investment decisions that support other fiduciary duties.

The scale of this new shift is quite remarkable - global ESG assets surpassed ￡23.7 trillion in 2022 and are on track to exceed ￡31.6 trillion by 2030, representing over 25% of projected total assets under management globally. While still a minority of total assets, this represents a dramatic increase from just a few years ago – with sustainable investment assets showing well above a tenfold increase since 2004.

However, challenges still remain in turning this on-going momentum into measurable impact. According to a survey by the Association of Investment Companies, greenwashing remains a major concern, with the number of investors worried about it rising from 48% in 2021 to 63% in 2023. This shows the investment industry still has a long way to go in building trust around ESG claims.

Adding to this, inconsistencies in ESG data and varying methods across rating providers have led to divergent scores (for the same company), causing understandable confusion and frustration among investors and corporations. This lack of transparency and consistency around rating processes and potential conflicts of interest have also raised concerns.

Regulators are now starting to scrutinise ESG rating providers more closely, with some jurisdictions introducing voluntary codes of conduct or regulations. However, there is a continued debate around too much regulatory intervention, with some arguing that this could stifle innovation and agility – especially for smaller businesses.

For CFOs and financial managers, addressing these challenges head-on will be essential for directing capital towards sustainable and profitable outcomes. But the direction remains crystal clear - ESG factors are here to stay as a central part of the investment process.

The High Demand for ESG Finance Skills

The quick growth and necessity of ESG investing has led to a significant skills gap, with 84% of Chief Financial Officers facing significant talent shortages. This talent crunch is particularly noticeable in areas like ESG risk management, data analysis and technical knowledge (related to sustainability issues).

The high demand for ESG skills is evident in the sheer volume of job listings. Recent data clearly shows the soaring demand for ESG skills across most sectors and locations. LinkedIn job postings, fastest-growing job reports and recruitment firm insights all point to a thriving ESG job market with a wide array of roles in high demand, even as the supply of qualified candidates lags woefully behind.

In response to this skills shortage, specialist recruitment firms are emerging to help organisations find the necessary ESG talent they need. These agencies have developed extensive networks of professionals and a deep understanding of the specific skills required for success in ESG finance roles.

The predominant areas and skills in demand include data analysis, ESG risk assessment and competency in understanding sustainability reporting standards. As regulations inevitably change moving forward and disclosure frameworks become more demanding, finance directors must stay fully up-to- date on the latest requirements; effectively communicating ESG performance to department heads and stakeholders and to ensure strict compliance.

Ultimately, the finance professionals who will be most successful in ESG investing are those who can combine traditional financial acumen with modern sustainability expertise. This means understanding general financial practices and risk models, whilst also grasping the important ESG factors that can impact long-term value creation. Developing this combination of skills will be essential for all finance managers looking to propel their careers forward in the industry. Other roles that are in high demand also rest on these particular skills. As companies face more pressure to clarify and disclose their environmental and social impacts, they require experienced accountants who can measure and report on the correct ESG metrics. Sustainability accounting calculates intricate factors of carbon emissions, water usage, diversity and inclusion, along with supply chain practices.

CFOs and finance controllers need to understand GRI, SASB and TCFD frameworks, so accountants with experience and knowledge of integrated reporting (which combines financial and sustainability disclosures) are especially sought after.

CMG Viewpoint

As ESG considerations become deeply embedded in every aspect of the investment process, from risk assessment to portfolio construction, those with the knowledge and skills to address these challenges will be well-positioned to seize the many opportunities that accompany it.

The growth trajectory of ESG investing certainly shows no signs of slowing. With trillions of pounds flowing directly into sustainable investment and a growing recognition of the financial materiality of ESG factors, the demand for professionals with sustainable finance expertise will only continue to increase.

For those who embrace this challenge and commit to developing the necessary skills, the rewards are likely to be significant – both in terms of career advancement and the opportunity to make a meaningful impact.

The question really, is how to incorporate ESG considerations into investment strategies effectively and authentically. By staying at the forefront of this point, CFOs can position themselves to thrive in an industry where the pursuit of profit is increasingly intertwined with the creation of long-term, sustainable value for all involved.

The rise of ESG presents a wonderfully rare opportunity to move the power of finance underneath the needs of sustainable business – an opportunity that the most skilled and forward-thinking professionals will undoubtedly seize.

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