In recent years, there has been a growing recognition that financial institutions can play a pivotal role in addressing global challenges while simultaneously driving business growth. This shift represents a significant opportunity for firms across the financial services spectrum, from traditional banks to hedge funds and asset managers. By leveraging financial innovation and embracing a more holistic approach to value creation, these institutions can deliver both profits and positive social impact.
The Rise of Social Impact in Finance
The financial sector is increasingly acknowledging the importance of social issues alongside environmental concerns as part of their business ethos. According to a global survey conducted by Boston Consulting Group (BCG), financial institutions (Fis) in most regions reported that their institutions devote comparable time and resources to social issues as well as climate activities. This trend reflects a broader shift in stakeholder expectations and the recognition that social factors can significantly impact financial performance.
To a degree, social agendas are self-serving on a business level. ‘Reputational benefits’ was the most-cited driver for both social and climate agendas among companies—80% and 69%, respectively.
However, business benefits can pair with aspects of social wellness in terms of goals. For example, the BCG survey found that 58% of respondents view ‘employee motivation and retention’ as one of the top five drivers for action on their bank’s social agenda. This suggests that financial institutions are recognizing the importance of aligning their practices with the values of their workforce to attract and retain top talent, with clear implications in terms of longevity, employee happiness, and employee wellness alongside business results.
The Business Case for Social Impact
Indeed, contrary to the notion that social impact initiatives come at the expense of profitability, evidence suggests that addressing social issues can create significant business opportunities. And while pairing social and business initiatives successfully can be difficult, business context and a deliberate approach can drive success.
This is particularly evident in developing markets. “We definitely see social as a driver for financial performance because we operate in developing countries, and there are large, underserved populations,” as Darice Gubbins, head of sustainability at Credicorp, explains in BCG’s report. “So, we aim to find a win-win for social responsibility and the financial success of our bank.”
In fact, the potential for financial inclusion to drive business growth is substantial. Globally, about 1.5 billion people do not have a bank account, while 2.8 billion are underbanked, BCG reports. This represents a vast untapped market for financial services firms that can develop innovative products and services to meet the financial and social needs of these populations.
Key Areas of Focus for Financial Institutions
Despite these possibilities, many Fis struggle to determine where to begin with their social initiatives—especially in terms of driving both social and business results. The following key areas have emerged as critical focus points for banks, hedge funds, and other financial firms looking to balance business growth with societal benefits.
1. Financial Inclusion and Wellness
Financial inclusion and wellness consistently rank as high priorities for banks across multiple objectives, including risk management, commercial benefits, and positive impact creation. Critically, these efforts can lean on FIs’ core offerings rather than require efforts completely outside companies’ core lines of business.
“It is a lot easier for financial institutions to make a difference by expanding access to finance and financial wellness than it is if we focus in other areas because it leverages our core business,” as Andrea Barrack, senior vice president of corporate citizenship and ESG, describes in BCG’s report.
Hedge funds and asset managers can contribute to this effort by investing in fintech companies developing innovative solutions for underserved populations or by creating investment products that support financial inclusion initiatives.
2. Sustainable Finance and Impact Investing
The development of social finance products, such as green bonds and impact investments, may represent a key lever for accelerating banks’ social agendas. According to the BCG survey, 52% of respondents ranked social finance products such as bonds, loans, and IPOs among the top five most promising levers for advancing their social agenda.
For hedge funds and asset managers, this trend presents opportunities to develop new investment strategies and products that align with social impact goals. This could include launching dedicated impact investing funds or integrating social metrics into existing investment processes.
3. Just Transition and Climate-Social Integration
As the world moves towards a low-carbon economy, ensuring a just transition has become a critical concern. The BCG survey found that 89% of respondents believe it is important or extremely important for banks to consider the potential social impacts of their climate activities.
However, there is still work to be done in integrating social considerations into climate decisions. Only 31% of respondents reported that social impacts are almost always or often integrated into their bank’s climate-related decisions. This gap presents an opportunity for financial institutions to develop more holistic approaches that address both environmental and social concerns simultaneously.
4. Data Security and Privacy
Needless to say, data security and privacy have emerged as top priorities. While these priorities have clear implications in terms of line-of-business initiatives, they also fall within firms’ social governance responsibilities—specifically concerning their employees, partners, and clients.
The BCG survey found that data security and privacy were ranked as the most important social issues when a bank’s main goal is to manage risk. Financial institutions must invest in robust cybersecurity measures and transparent data practices to maintain trust with clients and stakeholders.
Strategies for Implementation
To effectively drive both profits and social impact, financial institutions should consider the following strategies:
- Integrate social impact into core business strategy: Rather than treating social initiatives as separate from the main business, institutions should look for ways to embed social impact considerations into their core products and services.
- Leverage technology and innovation: Financial innovation, particularly in areas like AI and blockchain, can enable more efficient and inclusive financial services. “Financial innovation involves the creation of new products, services, or other innovations that relate to the financial industry,” according to Johnson & Wales University. “Often, these innovations are sparked by disruptive technologies, although they may also reflect social movements or emerging public priorities.”
- Collaborate and form partnerships: Many social challenges require collective action. Financial institutions should seek partnerships with NGOs, governments, and other stakeholders to maximize their impact.
- Enhance measurement and reporting: Developing robust metrics and reporting frameworks for social impact is crucial.: “We need to invest in high quality, credible data for two primary reasons: [they] can help us measure the social impact we are creating and establish the business case for driving change related to social topics,” says Rachel Mattes Greenberg, head of sustainability at Citizens Bank in BCG’s report.
- Prioritize employee engagement: Given the importance of employees in driving social agendas, institutions should involve their workforce in shaping and implementing social impact initiatives.
Conclusion: Creating a Future of Social Impact in Finance
The financial services sector stands at a critical juncture, with the opportunity to redefine its role in society while driving sustainable business growth. By embracing financial innovation and integrating social impact considerations into their core strategies, institutions across the spectrum—from traditional banks to hedge funds—can position themselves as leaders in addressing global challenges.
But the path forward requires a commitment to innovation, collaboration, and a willingness to rethink traditional business models. For example, “there’s no shortage of creative ideas and impactful use cases for business transformation—with exciting new capabilities to cut costs, boost efficiencies, enhance productivity, and deliver better customer support,” as Bill Borden, Corporate Vice President of Worldwide Financial Services at Microsoft describes. “What is equally if not more important… is the power of AI to help solve some of the world’s most challenging social problems.”
Indeed, artificial intelligence (AI) has the potential to close the gap between social goals and business initiatives that drive holistic results for financial firms. It is financial institutions that successfully navigate this transition to AI that will not only contribute to positive social change but also secure their competitive position in an evolving global financial landscape.
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