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ESG challenges in finance laid bare

Two recent reports underline some of the challenges currently buffeting the financial aspects of ESG.

Asset manager support for environmental and social proposals saw a significant decline in the 2024 proxy season with particular challenges in US asset managers, according to a report from Morningstar Sustainalytics. 

A rapid drop in support

In the special report, the firm’s Director of Stewardship Research & Policy, Lindsey Stewart, CFA paints a clear picture of decline in asset managers support for significant US shareholder resolutions on environmental and social themes.

The average support by 20 large US asset management firms for significant environmental and shareholder resolutions declined to 31% in 2024 from a high of 54% in 2021. This information is uncovered in the shareholder voting data, as collected by the Morningstar proxy voting database and analysed by Morningstar Sustainalytics stewardship research. The report also notably showed a widening gap between proxy voting trends in Europe, with votes by 15 European asset managers averaging 96% over the last five years, painting a stark contrast between the US and Europe.

“We are definitely seeing a widening gap – really a gulf to be honest – between asset manager support for environmental and social-related voting initiatives in the US versus Europe,” Stewart commented. “While consistent support continues to exist for these initiatives in Europe and among US sustainable funds, we have seen a very consistent decline among major US-headquartered asset managers in recent years with the potential to accelerate as we enter the 2025 proxy season.”

UK companies failing to make ESG aspirations a reality

Across the pond in the UK, ESG initiatives remain out of reach for the majority of businesses, according to ‘The Finance and Business Synergy Report’ by expense management platform Pleo.

The report reveals the growing tension between sustainability aspirations and practical implementation. While 62% of UK businesses recognise ESG reporting as a critical step toward improving their sustainability and ethical impact, over half (57%) admit that the cost of ethical spending makes it unfeasible under current conditions.

These findings align with EY’s Future Consumer Index, which underscores how sustainability and ethical priorities are often sidelined during periods of financial strain. The challenging economic environment has pushed ESG initiatives lower on the agenda, leaving many businesses unable to make meaningful progress toward their goals.

With mandatory ESG reporting set to expand in 2025, the research underscores an urgent need for accessible and cost-effective solutions to enable UK businesses to embrace sustainable practices while safeguarding their financial stability and making sure compliance doesn’t stand in the way of growth and innovation.

The tough economic climate is not the only challenge UK businesses face in advancing ESG initiatives. A pervasive fear of losing business momentum is also preventing change. According to the report, 69% of companies believe slowing or pausing spending harms future growth opportunities. This anxiety, combined with the fact that 87% have reduced spending in the last 18 months, makes redirecting budgets toward ESG initiatives even less likely.

One potential way forward lies in strengthening collaboration between finance teams and other departments. The report highlights that 66% of respondents believe greater cross-departmental insights and collaboration would lead to better spending decisions, while 72% agree that collaboration between finance and other teams improves financial resilience and success. By fostering a collaborative approach, businesses could identify opportunities to streamline spending, potentially freeing up resources for ethical investments.

The CFO as a catalyst for change

With sustainability now closely tied to financial strategy, the CFO has emerged as a critical decision-maker in driving ESG initiatives. Finance leaders must not only understand the value of sustainable and ethical spending but also ensure it is firmly embedded into the broader business strategy and core values to guarantee that sustainability remains a priority and its impact is effectively realised. Additionally, CFOs must champion ESG initiatives, fostering a culture of accountability and commitment across the organisation.

However, challenges persist. The survey found that 59% of respondents view finance teams as difficult to work with, often due to general anxiety around financial discussions. This dynamic can hinder knowledge sharing and collaboration. To overcome this, CFOs and finance teams could focus on improving soft skills to build trust and foster smoother interactions with other departments.

“The Finance and Business Synergy Report highlights that while businesses understand the importance of ethical spending, they struggle to reconcile it with immediate financial pressures,” noted Søren Westh-Lonning, CFO of Pleo. “The brutal truth is that, to some, sustainability and social impact can feel distracting. For ESG to move up the business agenda, a shift in mindset is essential. Leadership teams need to integrate ethics into core business opportunities. CFOs, in particular, have a significant role to play by aligning ESG reporting with business models and value creation.”

As businesses navigate economic uncertainty, collaboration and leadership will be key to making sustainable and ethical practices a viable reality.

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