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ESG - Sustainability in Capital Markets

Managing your corporate ESG transformation

The need for action has never been greater than today. Climate change is seriously threatening our planet. At the same time, we are seeing an increase in the environmental movement, which is bringing the topic into the public focus.

As a result, our social awareness of ESG (environmental, social and governance issues) and the urgency to act has reached a new dimension.

Financial institutions have started to actively engage in the topic and initiated first projects. For example, we can observe that several clients define their own ESG strategy and think about benchmarks to track their ESG performance. They define steps to improve their ESG compliance including measures to monitor the adherence to social, governmental and environmental standards of their suppliers. Additionally our clients define the extent to which the status of ESG compliance should be communicated to the stakeholders and the international reporting standards (e.g. GRI Sustainability Reporting Standards). Finally, the regulator has also become active and has issued its own legislative initiatives such as the EU Disclosure Regulation (SFDR), UCITS or MIFID II. Consequently, market participants must integrate the associated adjustment effort with regard to existing products, processes and systems into their overall ESG strategy.

We will work with you to manage the path of becoming a sustainable company. From strategy to implementation, our expertise adds value along the complete value chain. We combine a deep understanding of products and processes and have the ability to transform regulatory requirements into pragmatic solutions using cutting-edge technology.

Regulatory Overview

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EU Taxonomy

The EU taxonomy has been developed to serve as a classification system to outline and specify sustainable economic activities. By offering guideline and appropriate definitions on sustainable activities to companies and investors, it is expected to reduce greenwashing, increase transparency and enable help shifting and allocating investments to sustainable activities.

Therefore, the EU taxonomy can be seen as the effort to develop a common language and clear definition of which activities are to be classified as sustainable. Reaching a common understanding is a key cornerstone to direct investments towards sustainable projects and activities that will help achieving the EU’s climate and energy targets for 2030 and the objectives of the European Green Deal.

The EU Taxonomy defines technical screening criteria for economic activities which:

Make a substantive contribution to one of six environmental objectives:

  • Climate change mitigation
  • Climate change adaption
  • Sustainable and protection of water and marine resources
  • Transition to a circular economy
  • Pollution prevention and control
  • Protection and restoration of biodiversity and ecosystems

Do not significant harm to the other five

Meet minimum safeguards such as the OECD Guidelines on Multinational Enterprises and the UN Guiding Principles on Business and Human Rights

To develop the EU Taxonomy within the framework of the underlying Taxonomy Regulation, the European Commission established a Technical Expert Group (TEG) on sustainable finance. On 9 March 2020, the TEG published its final report on the EU Taxonomy, with recommendations on the design of the EU Taxonomy, implementation guidance and specific technical screening criteria to assess activities with regard to their sustainability contribution.

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EU Green Bond Standard

The market for green bonds has already grown strongly in recent years and investor demand far exceeds supply. With the introduction of the new EU Green Bond Standard, the European Green Bond market is now facing an important change:

As part of its action plan for financing sustainable growth the EU Commission intends to promote of the green bond market and create an EU Green Bond Standard, which is based on the EU Taxonomy. After the Technical Expert Group appointed by the EU developed a draft for the EU Green Bond Standard as well as measures for the promotion of the European Green Bond market and the EU Commission carried out a corresponding consultation, its implementation into European law is now imminent.

Both the EU Green Bond Standard and the EU Taxonomy will gain great importance for all capital market-oriented companies in the coming years. The requirements for the selection of projects that can be refinanced by green bonds are significantly higher under the new EU Green Bond Standard than under the ICMA Green Bond Principles, for example. In order to continue to be part of the rapidly growing green bond market in the future and to benefit from the associated advantages, issuers should prepare themselves early enough for the challenges associated with the EU Green Bond Standard and the EU Taxonomy.

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SFDR

The Disclosure Regulation SFDR entered into force on March 10 2021. Since then financial institutions are obliged to disclosure ESG risks and potential adverse impact on sustainability per each financial product on their website, periodical reports and pre-contractual information.

The regulator demands to disclose:

  • A description of impact & procedures for assessing sustainability risks and reference to the degree of compliance with the Paris Agreement
  • The identification & prioritization of sustainable negative effects on investment decisions and description of appropriate countermeasures
  • The commission system and assessment of probable yield losses due to sustainability risks

In February 2021 the EU published final Regulatory Technical Standards which imply almost twenty mandatory indicators which need to be taken into account by valuating the adverse impact for a financial product.

  • Climate and environmental-related indicators
  • Social, employee, human rights, anti-corruption, anti bribery indicators
  • Indicators applicable to investments in sovereign and supranational
  • Indicators applicable to energy-inefficient real estate assets

In addition the EU proposed a load on voluntary parameters.

The regulation is one measure as part of the EU action plan with the objective to provide more transparency on financial markets. It is dedicated to avoid the risk of greenwashing and to create a level-playing field for market participants with the provision of standardized templates. SFDR will be an important tool to leverage the availability of ESG data in the market.

Until then, participants have challenges to collect, elaborate and evaluate necessary data to deliver the required information in order to set up an efficient process.

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MiFID II

As part of the broader EU initiative to foster the development of sustainable finance extensions to the MiFID II framework have been made.

Major changes require the integration of client´s preferences in terms of sustainability as a main cornerstone of the suitability assessment. As a consequence, firms providing investment advice and portfolio management are required to extend their suitability assessment covering non-financial investment objectives of the client.

By considering this additional dimension, it is possible to advise customers in an even more targeted manner and to direct investments more towards sustainable products.

In operational terms, firms providing investment advice and portfolio management need to make sure that considerations of sustainability factors is incorporated as part of their processes. This includes training of advisors to tailor advisory services to sustainability seeking investors, extension of investment advice processes, enhancement of data to incorporate sustainability aspects and extension of product offering.

Firms should be aware of the changes the MiFID II extensions requires and early on review and map out required changes.

Main Challenges

Increased regulatory requirements

In recent years a new wave of ESG related legislation has found its way into the financial services industry. It will require significant enhancement of internal capabilities and adjustment to approaches in a variety of areas such as strategy, risk management and reporting.

Changing client perspectives

Client expectations are rapidly changing. It becomes more important that investments are actively addressing urgent issues relating to environmental and societal issues. Financial institutions need to understand client demands, adjust their product offering, and increase transparency relating to ESG performance.

Data Management

Rising regulatory requirements call for increased efforts related to sourcing and managing of ESG related metrics and data. Financial institutions will need to create strong ESG data frameworks and design and implement IT solutions that support an efficient sourcing and management of ESG data.

Adaptation of processes and systems

Smart IT solutions support financial institutions along the way of facing sustainability challenges. Especially increased efforts relating to data management and reporting can be tackled by designing and implementing solutions that use advanced analytics and increase automation.

LPA Offering

Regulatory Analysis

We offer extensive experience in managing regulatory requirements within the financial industry. Our experts will help you monitor and understand the regulatory landscape and highlight requirements for your company.

Status Quo Analysis

Our experts will conduct a deep-dive analysis on the ESG status of your company. We will match regulatory requirements against the current setup of your company.

Roadmap

We will develop a conjunct understanding of an ESG Roadmap to tackle all relevant regulatory and entity specific requirements.

Data Management and Process Design

We have extensive knowledge of the relevant data and data integration – we analyze, design and implement efficient processes across the entire value chain of our clients.

Project Management

Our consultants have extensive experience in programme- and project management. We will help you setup, organize and manage your ESG transformation project.

Cutting Edge Technology

We offer powerful solutions that help you meet regulatory requirements and speeds up your digital transformation process. We are providing modules that are used as building blocks within your digital setup. Our modules are highly configurable, so they fit seamlessly into your digital infrastructure.

Use Cases

Our offers address various use cases for our clients. Please find below selected examples.

 

Vendor Rating

Our client intends to rate all of his vendors and suppliers with respect to ESG factors on a frequent basis. Our client links specific financial (incentives) and consequences to the rating outcome. Our client benefits from managing his supply chain and to improve his own ESG footprint.

Our approach:

We build a rating framework based on UN Sustainable Development Goals (SGDs). Together with our client we select those UN SDGs which are important to the client and weight each UN SDG according to our client’s preferences. For each UN SDGs we specify rating criteria and specific data points which measure the rating criteria. The data points are collected from publicly available information and additional requested data for each vendor. Based on these data sets and particular methods of artificial intelligence, we create a recurring vendor rating for each supplier.

Our client can retrieve rating data on a frequent basis via a GUI and can simulate ratings across industries and sectors. The rating is used for active discussion with suppliers in order to reach a better ESG rating on a common approach.

Your advantages:

Elevation of your ESG footprint within the supply chain

Leverage of your bargaining power in negotiations with vendors

Risk minimization in vendor selection and management

AI-methods enable cutting-edge data processing and calculation

Customized methodology based on your goals

 

See more information on our vendor rating approach

 

Issuer Rating

Our client intends to rate issuer of fixed income products which are themselves labeled as “green” based on specific parameters. Our client intends to identify and disclose larger discrepancies between issuer and issued products.

Our approach:

Our client asks us to build a rating framework based on UN Sustainable Development Goals (SGDs) as objective criteria for Sustainability and which are adhered to by many international companies. We selected and weighted UN SDGs based on client’s preferences. The client works together with a data provider that provides us with raw data regarding UN SDGs exposure per company. These data is processed by us. We apply different stochastically methods in order to generate a sustainability rating for our client. The rating is displayed via a client-centric GUI and users can check, monitor, compare or simulate ratings from companies and industry sectors.

Your advantages:

Disclosure of ESG alignment between issuer and product

Higher transparency and comparison possibilities are trust-building for investors

AI-methods enable cutting-edge data processing and calculation

Customized methodology based on your goals

 

Green Bond Transition

Green bonds are an important tool to mobilize the required investment capital for the transition to a more sustainable economy and for combating climate change. The market for green bonds has rapidly increased over the last years and will continue to grow because the demand for sustainable assets exceeds the supply by far. Issuers usually benefit from lower funding costs and from attracting new investor groups.

The introduction of the new EU Green Bond Standard (EU GBS), which is based on the EU Taxonomy, will mark the beginning of a new chapter for the European green bond market. On the one hand, the EU GBS significantly increases the requirements for issuers. On the other hand, the EU will most likely promote the use of the EU GBS by implementing corresponding incentives for issuers and investors. In order to be part of the fast-growing green bond market and to benefit from the associated advantages, bond issuers should prepare for the upcoming challenges early enough.

In this context, banks play a crucial role on the primary market for green bonds. On the one hand, they support corporates and public sector entities in green bond issuances. On the other hand, they issue green bonds themselves in order to re-finance their loan portfolio. Since the portfolio consists of many loans and the portfolio composition frequently changes, Treasury Divisions of banks face additional challenges regarding the selection and management of eligible assets for green bond issuances and regarding the required reporting.

Our approach:

Our consulting approach helps DCM and Treasury to create operational readiness for green bonds issuances – also under the new EU GBS. It combines our deep expertise in capital markets products and regulation with many years of experience in automating securities issuances and generating the required legal documents. We help you to set up appropriate governance processes, which ensure that green bond proceeds are actually invested in green projects. We assist in gathering the additional data to assess which assets are eligible for re-financing through green bonds. We support Treasury in integrating the management of green assets and liabilities into the overall steering processes of the banking book. Finally, we increase efficiency in your reporting processes.

Your advantages:

Long-term experience consulting services in capital markets

Cutting-edge automation and processing technology

Holistic ESG market and regulatory monitoring

 

Further information can be found in our whitepaper, which can be downloaded from our Green Bonds webpage

 

 

 

 

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