ESG PERFORMANCE Enabling the sustainable transformation of financial institutions

This document will not be printed INTRODUCTION

Eighteen of the warmest years on record were ESG Performance - part of an institution’s non-financial registered in the last two decades, and greenhouse gas performance, or more specifically, a measure of its emissions continue to rise despite the targets set by the Environmental and Social impact, as well as its Governance Paris Agreement in 2016. Ecosystems are under stress practices – is a series of criteria to assess an institution’s with significant biodiversity loss, while environmental sustainability positioning. It is a powerful tool for financial degradation is increasingly felt on multiple fronts, such institutions to evaluate, measure and monitor where they as air and water pollution. Businesses and communities stand in terms of sustainability, steer decision making, around the world are already feeling the impact, and communicate on progress towards sustainability most evidently with the increasingly frequent natural commitments. catastrophes, such as wildfires and flooding. How should financial institutions fully integrate ESG performance considerations into their processes? Today, research shows that we may be reaching a tipping It is a challenge. But, due to urgent climate considerations, point, emphasizing the urgency for individuals and and a growing mobilization of the international community institutions to take action to protect the environment. around sustainability, a large number of best practices, While global efforts are still disjointed, momentum has standards and regulations are emerging. These are helping been growing since the Paris Agreement, placing financial to structure the response of financial institutions to the institutions at the heart of the transformation towards challenge of transformation ahead of them. a more sustainable economy. Through their central role and economic influence, financial institutions are well positioned This report aims to address the question of how financial to be key players in the global sustainability agenda. institutions can adjust to the existing and upcoming regulations pushing them to leverage ESG performance as a tool to be active participants in the decarbonization of the economy. It will use concrete and operational examples of how to lead the transition to a sustainable economy.

2 “As more investors choose to tilt their investments towards sustainability- focused companies, the tectonic shift we are seeing will accelerate further. And because this will have such a dramatic impact on how capital is allocated, every management team and board will need to consider how this will impact their company’s stock”

LARRY FINK – BLACK ROCK CEO1

3 KEY TAKEAWAYS

Financial institutions, key players in the decarbonization of the economy, need to demonstrate agility and pragmatism to accelerate their sustainable transformation:

• Financial institutions are facing • With the transformation presenting fight against climate change. This an in-depth transformation of a series of open-ended questions raises some uncertainty around their role in the financing of the in terms of the operational the role the United States will play economy, with a growing focus on repercussions of these changes, in the development of existing directing capital towards projects coping and making the most of sustainability standards and norms, and companies contributing this still maturing environment will whether they will collaborate with to the sustainable shift of the require pragmatism, agility, and the EU on their development and economy at large. This change flexibility from financial institutions2. implementation or rather impose stems from the pressures of the their own framework. ecosystem (investors, clients, and • European financial institutions are all stakeholders in general) and leading the way when it comes of a rapidly evolving landscape of to integrating sustainability in regulations and market norms, their value chain and defining ESG combined with the realization of the norms and standards3. The Biden beneficial nature of this change for administration in the United States their own performance. re-engaged in the Paris Agreement in early 2021 and is showcasing a strong ambition to take a leading role on sustainability and in the

4 A skillful orchestration of the use of data is a prime success factor to ensure the integration of ESG considerations:

• Measurement of the non-financial performance of third parties and transactions is the one core issue to be addressed to make overall non-financial accounting work and provide the necessary input for relevant decision-making.

• Addressing this issue in a still maturing environment, with scarce and often unstructured data of uneven quality, requires a long- running iterative approach to identify and source relevant data and combine it with existing data to gain expected insights. In particular, creating ecosystems of relevant partnerships with external data providers can be a potent lever in a market with fast emerging solutions.

• The experience and best practices gained in the implementation of regulatory-driven transformations over the 2008-2018 decade should be put to good use, particularly the insights on the redefinition of processes to account for the digital transformation, the integration of artificial intelligence and automation, and the leverage of human centric design for reporting.

5 The magnitude of change will have deep rooted ramifications for financial institutions, and demands the robust development of a specific trajectory, governance and communication plan:

• As with any cultural change, the • Beyond the communication that is • In our experience, convergence and journey starts with the definition of required around reporting, it will be industrialization of the accounting, a corporate-level strategy structured key for financial institutions to engage a steering infrastructure, along the growing body of norms in an ongoing internal and external a reporting framework, and a robust and standards. The change needs communication to mobilize both communication plan are key levers to be rooted in most functions and employees and clients around those for success. Their implementation embedded into the overall structure topics. through iterative and agile processes of those institutions – new roles, new will pave the way and ensure responsibilities, and a governance efficiency to avoid later-stage structure to lead the efforts around refactoring and remediation. sustainability.

KEY CLIMATE STAKES IN EUROPE4

UP TO Climate 55% USD 6.9 tn neutrality cuts in greenhouse required up to 2030 emission (from 90s to meet climate and to be achieved before 2050 levels) targeted in development objectives in Europe, through creating an Europe by 2030 economy with net-zero greenhouse gas emissions

6 A NEW BOTTOM LINE FOR FINANCIAL INSTITUTIONS: non-financial performance to lead the path towards the sustainable transformation of the economy

7 The sustainable transition of the • Growing demand for the inclusion of the environment need to be economy is a massive endeavor, of non-financial risk factors (e.g., assessed, evaluated, and monitored requiring substantial funding environmental risks) in traditional as part of the financial institution’s exceeding the capabilities of risk models. risk management framework. states, prompting the need for Financial institutions will have to private funding of the transition. further adjust internal processes This transition is fueled by: The direct impact of this to integrate how to capture risks transformation means that related to non-financial performance • The significant appetite of financial institutions need to in their risks analysis. consumers, employees, investors, adjust internally and to start various stakeholders, and the public considering a double bottom line at large, to purchase from, invest including financial returns and Concretely, we believe such a in and interact with responsible sustainability. The operational transformation needs to be played institutions; consequences are threefold: on 4 different levels:

• A growing number of regulations • Performance is no longer linked • Strategic, to formulate relevant and norms aimed at funneling to financial results only: financial goals and align the company with financing towards the most institutions’ performance is now also its ambitions; sustainable companies, ventures, related to non-financial objectives, and projects. (climate, social, etc.) regulated by • End-to-end integration of ESG external institutions (mainly, as of performance and sustainability today, by the European Commission). considerations in business decisions Europe has led the way in This criterion heavily relies on the and steering throughout the credit developing a sophisticated nature, quality, and sustainability of and investment value chains; framework of regulations to adjust companies and of projects that are the structure of financial markets supported and funded. To this end, • Specific data usages to address through: sustainability aspects need to be the dual issue of third-party non- embedded and evaluated in business financial performance measurement • The development of a definition of decision-making processes to deliver and company-wide accounting; what it means to be responsible and on this new set of non-financial sustainable (e.g., EU Taxonomy) for objectives. • Fully-fledged data management all large companies; to handle the sourcing, lifecycle, • Transparency is key for compliance distribution, and usage of the data. • The imposition of disclosure and recognition: broad and requirements for relevant and increasing transparency legible measurements of the requirements mandate the non-financial performance of construction of trustworthy their activities (e.g., Non-Financial reports addressing expanding Reporting Directive – NFRD – since regulatory requirements and 2018, and the much more ambitious reporting progress on the company’s upcoming Corporate Sustainability objectives, commitments, and non- Reporting Directive – CSRD – financial performance at large, in a expected by 2022); clear and legible way. This involves a transformation of reporting • The development of regulations processes that affects a wide range to ensure transparency on the of roles within the bank, from an actual non-financial performance of investment officer to an investor investments (Sustainable Finance relations or communications team. Disclosure Regulation – SFDR) for market participants, • Risk management expands to or ensure proper performance integrate new risk factors: the measurement (Green Benchmark); implications of new risk factors related to the transformation

8 KEY CONSIDERATIONS for financial instiutions to move forward in this transformation

9 Start small: pragmatism and agility

One of the main challenges of The precise structure of this In our experience, accessible yet this transformation is its current transformation, the exact stipulations transformational projects could unstructured and immature nature: of the regulations, and what the include: financial sector is meant to look like • The regulatory framework overall, once this process matures are still • Initiation and industrialization of and in Europe in particular, is still undefined, fluid and a work in progress. a sustainable transformation cockpit undergoing rapid developments The challenge that financial institutions to steer the transition and federate with major pieces of legislation and face today is not one of immediate and entities across strategic initiatives, regulatory standards still pending massive transformation, but rather one corporate-level commitments finalization (CSRD, SFDR, 4 of the 6 of a gradual long-term journey that and regulatory requirements objectives of the EU Taxonomy, etc.). will eventually change the face of the as they arise. financial sector. • Market norms and standards have • Measurement of asset portfolio ESG seen a flurry of recent developments Our convictions remain that: performance to enable financial aimed at providing actionable institutions to understand how to solutions to comply with new • Financial institutions need to engage relocate capital in a way that actively requirements (PACTA, PCAF, SBTi- in this transformation early, given supports the decarbonization of the Finance, etc.). the time required to handle the global economy. far-reaching implications on their • Solution vendors (rating agencies, business models, asset portfolios, • Sustainability-oriented customer data providers, e.g.) are either processes or simply staff skillsets segmentation, to support emerging or gradually maturing their and levels of awareness. For opportunities arising as a result value offerings to match market example, sustainability related risks of the sustainable transition of trends and new requirements as and opportunities have multiple the economy (e.g., for sustainable they surface. touchpoints along the investment investment appetite qualification or and lending process, resulting in the for corporate transition opportunity • Clients of financial institutions are need for top-down coordination targeting). themselves looking for their path and steering. forward within this “new normal”, • Non-financial risk integration in with their own set of interests, and • Agility, combined with asset-centered risk models to sector-specific approaches and experimentation and a keen market integrate risks resulting from constraints. and regulatory watch, will be the key climate change and other physical success factors to navigate the fast- and transition risks into traditional • This general sense of instability is moving environment. risk models. further reinforced by the recent re-entry of the United States in the • Financial institutions should identify arena. As the Biden administration a few projects with perceivable has reintroduced sustainability as business-oriented results, launch a priority, an opportunity arises for a first iteration, and prepare for the EU and the US to co-construct subsequent iterations to adapt a global framework leveraging the to the evolving environment and work done by the EU in the past few expand the transformational years. Today, uncertainties around outcome. the approach that will be retained by the US Government, its legislators and regulators remain.

10 “As the EU moves towards climate neutrality and steps up the fight against environmental degradation, the financial and industrial sectors will have to undergo a large-scale transformation, requiring massive investment5”.

EU COMMISSION

11 Embrace the change as an opportunity

With the structuring of financial • Adapt pricing to non-financial markets on non-financial performance of clients and dimensions, financial institutions counterparties, in line with their own are now in the position to make expected lower funding costs; a significant contribution to the transition of the economy towards • Develop data-based value-adding more sustainable models by services such as investment trickling down their objectives to analytics, transaction-based ESG their clients. analytics (incl. PSD2-enabled opportunities), or benchmarking on Our conviction, for financial non-financial dimensions. institutions is that this development is bound to result in a virtuous circle whereby: The availability and exploitation of relevant ESG data will be a key success • Direct revenues can be drawn from factor to reap the full benefits of these both transition-related projects new trends. carried out by their clients, and from investors’ appetite for ESG-aware or ESG-driven investments;

• More ESG-performing clients will result in a more favorable footprint for banks, with both top-line (better reputation drawing and helping retain more clients) and bottom-line effects (lowering funding costs).

To make it work in practice, INTEGRATION OF ESG STEERING IN DAY TO DAY SUPERVISION financial institutions should seek OF THE ACTIVITY: to leverage the new expertise, data, and models they develop or acquire, to adopt a new advisory In several financial institutions where posture towards their clients on CO2 footprint related KPIs were their transition and: introduced to steer portfolios, we have witnessed that the set targets • Combine (i) knowledge of often clashed with the previously international, national and local set financial growth targets. For incentives and schemes to facilitate instance, one bank set a sustainability and to fund transition-related target on its mortgage portfolio to projects and (ii) financing capabilities have only the highest energy labels to provide more levers for clients to in 10 years’ time. This could, by no engage in their transition; means, be met with acquisition of new mortgages alone. To meet both • Leverage insights drawn from non- targets, the bank introduced an financial risk models to advise clients energy transformation program for on significant investment projects; existing homeowners.

12 Orchestrate the use of data and leverage the relevant ecosystem

To succeed in this transformation, • The heterogeneity of data, highly financial institutions must sector-, asset- and project-specific, address the ESG measurement requiring a deeper understanding challenge of their counterparties, and modeling of non-financial asset portfolios and trading concepts. book. This is relevant both at the level of a single unit and to build a capability to integrate Our conviction is that the solution to unit measurements at the wider these two issues relies on leveraging group level. a combination of several types of data sources, split by segment, sector and As the NFRD doesn’t propose a data geographies, reflecting the specificities point model, financial institutions of the latter. Examples of relevant data have to interpret the regulations sources include aggregated ratings and organize for a demonstratable from specialized sustainability rating translation towards their own agencies (Vigeo Eiris, MSCI, Robeco taxonomy and what data elements SAM, etc.), datasets bundled in topical to collect. Ultimately, what is market standard models (e.g., PACTA, at stake is the construction of SBTi), public and open data sources, a comprehensive non-financial issued by NGOs and state actors, etc. accounting infrastructure, presenting the same level of quality and reliability We believe the trajectory to building as financial accounting. the comprehensive non-financial accounting mentioned above In pursuing this, financial goes through a series of iterative institutions are currently faced developments, each contributing to with 2 levels of complexity: stepping up a lasting infrastructure. Beyond data sourcing, this gradual • The scarcity of aggregated, use-case-driven construction should structured, and actionable data be guided by clear architecture to fuel the measurement of principles to avoid massive subsequent sustainable performance of third remediation projects of the same order parties, outside of the large of magnitude as that demanded by corporate segment (midcap, small BCBS 239. cap, professional and retail). As financial institutions rely on client disclosures, it will become key for them to efficiently collect sustainability related information on clients both at onboarding and during the loan monitoring stage. Several Fintechs (RepRisk, RDC, etc) have jumped onto this opportunity, but integration has been limited, or fragmented per business unit;

13 DATA COLLECTION LEVERAGING Finally, it is also relevant for financial LESSONS LEARNT FROM THE PAST institutions to capitalize on past lessons learnt. The period from 2008 In our recent benchmark study on until 2018 was a time of transformation sustainability data management by for financial institutions around digital financial institutions, we identified transformation, automation, and that almost 40% of participating integration of artificial intelligence banks have no data or rely on in processes. Today, leveraging best external data for their sustainability practices from those transformations risk assessment. Although banks can fast track and feed some of the may start out using external data, processes that need to be put in place fitting the sustainability profile to the actual legal counterparty can to adjust to the new and upcoming be difficult. External ratings are regulations. Another of the lessons mostly published on a consolidated learnt from that same time is the group level, and the borrower importance of privileging central data may only be a part of the group. governance and taxonomy, rather than Making the necessary rating operating under a siloed approach, adjustments becomes difficult and putting in place adequate data without an internal framework lineage documentation. in place. We therefore expect a migration towards internally based ratings, just as we previously witnessed in the credit domain.

Set up a dedicated governance for the transition

The success of such a pervasive • Anticipating and facilitating • Deploy an ESG Control Tower transformation of business and internal and external and the extra-financial indicators operating models also requires: communication over posture, followed at Group level to all performance, and achievements in business lines, and integrate them in • Federating all entities around the the sustainability space. traditional management reporting Group’s sustainable transformation and control; and creating the appropriate level of mobilization of staff and We believe that addressing these • Seek full integration of ESG data into management on identified impacts; points requires the setting up of the financial institution's already a dedicated governance, based on established data management • Monitoring and steering the following principles: frameworks, formally aligned achievements against Group with the increasingly stringent strategy to ensure communication • Establish an “ESG Control Tower” requirements of data contributing on and adherence with aligned with regulations and to soon-to-be-audited disclosures; commitments made by financial norms, providing a 360° vision on institutions; achievements along the entity’s ESG strategy; • Realize a uniform methodology across portfolios, resulting in • Formalize and promote guidelines a sustainability impact that is across BUs to ensure the right measured consistently (preferably level of consistency on indicators LCA based); followed and collected throughout the Group;

14 • Activate and animate the sustainable community, including the amplification, duplication and cross- fertilization of achievements;

• Organize and drive the awareness and upskilling of employees on these new themes.

A key success factor to the effectiveness of such governance is the establishment of a coalition of key senior-level internal stakeholders, under CXO sponsorship, typically:

• Finance, in charge of the establishment of audited financial (increasingly, of non-financial) reports;

• Corporate Social Responsibility (CSR) or any equivalent in charge of leading the institution’s sustainable transformation agenda;

• Data Offices, bringing in the weight of the corporate-wide data management and usage framework.

15 GET STARTED

16 Given the trend towards overall • Sets and maintains the course in Mobilization of the internal company-wide transparency and providing transversal solutions as community can follow the activation the increasing importance of well as guidelines and standards of a company-wide community of demonstrating performance in to (I) facilitate local alignment sustainability practitioners and the sustainability field, we believe with company-level goals and (II) local transformation leaders. This an overall centrally steered accelerate creation and reuse of community gradually leads the roll-out company-wide ESG initiative is solution building blocks; of the ESG Control Tower locally. an effective model to drive the establishment of a company-wide • Provides momentum through Of particular importance is the non-financial accounting model demonstrating ESG-related and initiation of data architecture and and to use it as an accelerator of data-enabled business value in technological orientations for ESG the transformation. a short time. integration in the operations and IT systems. The establishment of In our experience, such an such principles is instrumental in initiative attains the best It is important to translate group- maximizing subsequent agility results if it: level strategy, different market through enabling the gradual and ecosystem expectations, and construction of an industrial-grade • Quickly establishes and shares regulatory requirements into a data architecture for ESG. a common vision on group-wide referential of extra-financial indicators. ESG ambitions, concrete goals and The latter forms the blueprint to the Finally, the construction of a high- key metrics, aligned with overall ESG Control Tower under the form of a value-added / high-visibility minimal corporate strategy, embedding prioritized repository of extra-financial viable product (MVP) is a key element commitments to the ecosystem and indicators relevant for the bank (vision in creating and sustaining momentum regulatory requirements; & purpose, CSR policies, extra-financial through demonstrating benefits communication, regulation, market...). reaped from the transformation, as well as providing awareness and communication opportunities.

FORMULATE Corporate level ESG strategy A MEANINGFUL Define relevantobjectives , related metrics, align processes and external communication STRATEGY

EMBED ESG Credit value chain Investment value chain PERFORMANCE Develop ESG-specific products, update Develop ESG-specificproducts redesign THROUGHTOUT policy, implement integration in operational investment processes to integrate ESG control THE BUSINESS processes, etc. and supervision, etc.

ATTAIN SCALE ESG performance measurement Decision-making and supervision THROUGH Orchestrate the implementation of Leverage reporting infrastructure to LEVERAGING regulations and standards systematize company-wide steering of ESG DATA USE CASES performance

Source data Organize data Mix data Leverage data INDUSTRIALIZE Select and ingest Define and implement Combine ESG and Inject data modelling THE DATA the most a company-wide data financial data in business processes INFRASTRUCTURE relevant data architecture

17 AUTHORS AND CONTACTS

Dalia ESG PERFORMANCE Bahous COUNTRY LEADS

Germany: Kiri von Trier Julien France : Aurélien Grand Garnier Belgium: Ilda Dajci Netherlands : Casper Stam

SWEFI: Johan Bergstrom Rob Norway: Liv Fiksdahl van Dijk Italy: Andrea Scribano Spain: Carmen Castellvi

US: Kavita Nar Noemie UK: John Middlemiss Lauer Australia: Shaila Pervin Hong Kong: Samuel Levy-Basse

Singapore : Tatiana Collins Peiyao India : Rajesh Varma Liu

Special thanks to Julien Assouline, Keith Gage, Aurelien Grand, Joachim von Puttkamer, Stanislas de Roys, Casper Stam. SOURCES

1 https://www.blackrock.com/us/individual/2021-larry-fink-ceo-letter?gclid=Cj0KCQjwp86EBhD7ARIsAFkgakhWSeYcBkc8lWAoerhxf M1i4ep_NsSUvJGv5Kb4UGbKkZs8jATZn8aAlI5EALw_wcB&gclsrc=aw.ds 2 For interesting EU taxonomy implementation lessons learnt from financial institutions see: https://www.ebf.eu/wp-content/ uploads/2021/01/Testing-the-application-of-the-EU-Taxonomy-to-core-banking-products-EBF-UNEPFI-report-January-2021.pdf 3 See EBA Guidelines on loan origination and monitoring: https://www.eba.europa.eu/sites/default/documents/files/document_library/ Publications/Guidelines/2020/Guidelines%20on%20loan%20origination%20and%20monitoring/884283/EBA%20GL%202020%20 06%20Final%20Report%20on%20GL%20on%20loan%20origination%20and%20monitoring.pdf 4 https://www.eea.europa.eu/data-and-maps/indicators/greenhouse-gas-emission-trends-7/assessment https://www.oecd.org/environment/cc/climate-futures/policy-highlights-financing-climate-futures.pdf https://ec.europa.eu/clima/policies/strategies/2050_en 5 https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:52019DC0640&from=EN

18 About For more details contact: Capgemini Invent Dalia Bahous Managing Consultant As the digital innovation, consulting and transformation brand of the [email protected] Capgemini Group, Capgemini Invent helps CxOs envision and build what’s next for their organizations. Located in more than 30 offices and Julien Garnier 25 creative studios around the world, its 7,000+ strong team combines Principal strategy, technology, data science and creative design with deep industry [email protected] expertise and insights, to develop new digital solutions and business models of the future. Rob van Dijk Senior Manager Capgemini Invent is an integral part of Capgemini, a global leader in [email protected] partnering with companies to transform and manage their business by harnessing the power of technology. The Group is guided everyday by its purpose of unleashing human energy through technology for an inclusive Noemie Lauer and sustainable future. It is a responsible and diverse organization of Vice President – Financial Services [email protected] 270,000 team members in nearly 50 countries. With its strong 50 year heritage and deep industry expertise, Capgemini is trusted by its clients to address the entire breadth of their business needs, from strategy and Peiyao Liu design to operations, fueled by the fast evolving and innovative world of Senior Consultant cloud, data, AI, connectivity, software, digital engineering and platforms. [email protected] The Group reported in 2020 global revenues of €16 billion.

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