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, there is a widespread lack of preparedness and a lot of short-termism among financial services leaders, according to a recent report.

And although decarbonization 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, finds the survey by international law firm Mayer Brown.

The cost of transitioning to net zero, the study states, is 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. As costs rise and access to capital becomes more challenging, the study reveals, business leaders are increasingly looking towards alternative sources of innovative finance to facilitate the transition to net zero.

And, as companies face the financial challenges and complexities of this transition, many are turning to mergers and acquisitions (M&A) to accelerate their ESG progress and enhance their environmental credentials more quickly. M&A is viewed by 71% of financial institutions and 79% of investment firms, the study shares, as a way of supercharging organizational transformation over the next few years.

Despite the challenges, ESG has become a critical consideration for businesses. Financial institution leaders prioritize sustainability considerations, the study reveals, 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 and shareholder engagement.

“A move away from short-termism has been at the core of the ESG movement,” says Tim Baines, a partner at Mayer Brown. “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.”