Sustainability is a no longer a topic on the corporate communication agenda only. Driven by client needs, regulatory requirements as well as an increased appreciation of the risks involved, the subject has received increased attention in the financial services sector. Moreover, the societal call for the financial sector to contribute to a sustainable future continues to increase. Banks, insurance companies, asset managers, private equity and other market players are considered instrumental to finance and realise the transformation to a sustainable economy.
The European Commission has set an action plan on Sustainable Finance, aiming for a greener and cleaner economy, committing to the Paris climate agreement and incorporating the TCFD recommendations. We observe Sustainable Finance regulatory requirements to increase in terms of both magnitude and impact with market participants stepping up to the challenge.
We believe that Sustainable Finance is not only a regulatory requirement, but also an opportunity for you to make an impact on our environment and create opportunities. Furthermore, we believe integration of sustainability risk will improve your risk management.
We can assist you addressing the multiple challenges we observe market participants are facing, including:
- How can you align your strategic sustainability priorities with your strategic project portfolio?
- How can you meet the short regulatory timelines while aligning initiatives with your strategic priorities?
- How can you effectively manage the many sustainability driven change initiatives and strengthen your sustainability capabilities while facing resource constrains?
- How can you identify and manage the complex dependencies, with the implementation of sustainability requirements affecting both the BAU activities and the change initiatives already in place?
- How can you identify the most appropriate approach for sustainability risk integration while facing data availability issues?
We are passionate about sustainability and we make use of what we are good at to make a positive impact and to contribute towards a more sustainable society.
Developments within Sustainable Finance Regulations
We believe Sustainable Finance is one of the most important developments within the (regulatory environment of) financial sector. It is also still one of the lesser-known developments. However, this is expected to change very soon.
Over the last couple of years, there has been a large increase in the development of new regulations in the area of Sustainable Finance, coming from the European Union and the European Committee. Additionally, the European Union has developed an action plan for sustainable growth. Next to these developments, the United Nations has been able to increase the momentum of its program around Sustainable Finance (UNEPFI), which involves highly renowned financial institutions from around the globe. This initiative builds upon the Sustainable Development Goals and provides further substance to the Principles for Responsible Banking/Investments/Insurance.
As of today, regulations regarding financial disclosures, frameworks for KPIs and accounting standards, a taxonomy of economic activities and a range of scenario analyses looking into the impact of climate risks on the financial solidity of financial institutions have been introduced. A complication is that these regulations have published deadlines – sometimes in the near future – whilst a lot of the more detailed regulations are not final yet, thus giving the financial industry little time to prepare and implement. Sustainable Finance ranks high on the priority list of the DNB and they will integrate climate-related risks in their supervision and in the monitoring of financial stability.
The regulatory and supervisory initiatives aim for sustainability risk to become a full-fledged new risk category in the overall business operations of financial institutions. As a result, the impact of these new regulations on the financial services sector is very high.
We can support you in answering questions such as:
- What are the actual contents of new sustainability regulations and which sections of these regulations apply to us?
- How far do our ambitions reach in this area? Do we only want to satisfy the bare minimum of demands or do we want to be part of the early adopters and thought leaders and go way beyond the bare minimum? Or do we want to find a course of action somewhere in the middle?
- What is the impact on our organisation? To what extent do we have knowledge regarding these regulations in-house and do we have the right data, processes and systems available?
- How can we best organise the changes required for implementing Sustainable Finance regulations?
- How can we utilise these regulations to develop new business opportunities?
Over the last years financial institutions have developed and implemented policies to decrease risk driven by adverse environmental and social (sustainability) developments. While the primary focus of the initial measures was limited to reputational risk (resulting certain clients or businesses being excluded), many policies currently in place provide a basic framework to identify and manage sustainability risk. Most of these risk policies and measures have not yet been integrated into the primary risk and pricing models and processes. Lack of consistent and objectively measurable indicators are considered the main obstacle for integration. Besides the lack of measures, the extent to which such measures are relevant differs per sector, creating an additional challenge when designing and implementing a framework that is integrated into the primary risk and pricing processes.
We believe effective integration of sustainability risk will help you, next to meeting regulatory expectations, realise business benefits through:
- Enhanced resilience: Adding sustainability measures will help you anticipate emerging (sustainability) risks
- Competitive advantage: Investees that perform well on sustainability measures are well positioned to adapt their products and services to changing social and environmental expectations and requirements.
While the benefits and needs for sustainability risk integration are generally recognised, market participants are struggling to find the right approach and resources to do so effectively.
We can help you setting up or strengthening your sustainability risk framework that enables you to answer the following questions:
We believe such a framework will help you having control over your sustainability risk integration initiatives while being able to identify the critical elements of each of the building blocks of the risk cycle.
In the analysis phase the sustainability management framework is put to practice, leading to decision-useful outputs. The analysis of material sustainability exposures typically includes factors that can be tied to environmental developments (such as climate change, biodiversity and resource scarcity), social developments (such as human rights, diversity and product responsibility) or governance elements (such as business integrity, tax practices or transparency and accountability). Some factors are generally already captured in the risk processes, while others are relatively new and not always readily available. Moreover, most of the factors are generally difficult to quantify and therefore capture objectively.
Following the identification of the relevant sustainability factors, the next step in the analysis involves the assessment of your client portfolio’s exposure to those factors by relating those factors to your client’s value drives. At portfolio level scenario analysis and stress testing can be used to quantify the impact of adverse sustainability events.
We understand such analysis is more easily said than done, as a large part of the required data is not easily and objectively available. Furthermore, the traditional top-down approaches to stress testing and scenario analysis do not always produce the insights that are needed.
We can help you identify a structured approach addressing those challenges. Combining our in-depth knowledge and understanding of the relevant risk processes with the relevant market and regulatory developments enables us to provide you with an appropriate approach that will enable you to realise the benefits of sustainability risk integration.