Navigating sustainability and climate regulation in financial services

16 September 2020 8 min. read

The topics of sustainability and climate risk are increasingly shaping the agendas of financial services institutions, with much of this change fuelled by a growing number of pan-European regulatory frameworks. In discussion with, Rudy van der Linden and Carola Steenmeijer from ACE Company expand on how institutions can navigate the environment.

Why is the financial services sector faced with a growing number of regulations related to sustainability and SDGs?

As citizens of this world, we are facing an enormous challenge. Our current economies and ways of living are unsustainable. In essence, our production and consumption are too pollutive and we are using too many natural resources. We are already experiencing the first detrimental effects – extreme weather and environmental pollution leading towards a scarcity of clean air, water and healthy food. 

A transformation of our economies and our behaviour is urgently needed to stop and hopefully reverse these developments. This transformation will need huge investments and can’t be financed by public money alone. Private money is needed too. Hence, the EU and its governments have developed a (growing) set of regulations to stimulate the allocation of private money towards sustainable investments. In addition, regulations have been developed to incorporate sustainability and climate risk in the overall risk management approaches of the financial industry.

Timeline of the main mandatory changes and guidance publications

Over the past years a large number of methods to integrate sustainability into corporate functions has been developed. All of these methods are slightly different, resulting in a situation in which it is very difficult for investors to compare sustainability disclosures. In a triple effort to unify the European market, redirect investments towards sustainable objectives and protect investors, the EU has launched the Action Plan for Financing Sustainable Growth. 

The United Nations Environmental Program has also been very active and has launched several impactful initiatives for the financial industry, already starting in 2012. Most of the leading financial institutions are a signatory to these initiatives and have committed to make a significant contribution to a more sustainable economy.

In addition, most of the leading national regulatory bodies are sharing knowledge and are closely monitoring the sustainability and climate risks in the financial industry. 

Are institutions just treating regulations as a compliance exercise, or are there good reasons to take a broader viewpoint?

There is a wide variety of institutions, with an even wider set of ambitions. Some just want to comply; others want to be frontrunners. Some institutions want to go beyond compliance because they see business opportunities; other institutions want to do the same for more altruistic reasons. What opportunities arise from these regulations also depends on what line of business you’re in.

Yet there is certainty that this transition will not only bring new challenges and duties, but also opportunities and revived interest in the raison d’etre [purpose] of institutions. With regards to the opportunities: the energy transition, the insulation of houses and the mobility transition all need enormous investments and financial institutions are well positioned to leverage their knowledge and experience to develop these new opportunities. 

New green products will be needed for both the B2B and B2C markets and current products can become greener by adding sustainable elements to it. It would be difficult to overstate the opportunities for sustainable products for financial institutions. 

The Green Taxonomy requires large amounts of data to be readily disclosed

One of the major regulations being introduced is the Green Taxonomy. Changes to reporting is the first wave being rolled out; what impact is this going to have on the current ways of working?

All institutions that offer a product marketed with an environmentally sustainable characteristic will have to prove their sustainability claims by demonstrating alignment with the Green Taxonomy. This means that financial institutions will have to collect and process granular data on the environmental performance of their products using pre-defined metrics. 

Firms will have to assess how their current (sustainability) strategy relates to the Taxonomy, evaluate what and how they measure their sustainability targets, and see whether they can create synergies or differentiate themselves through the Taxonomy. 

In our view, sustainability factors will play a major role in all decision-making processes in financial institutions, from strategy to operational process; from the Executive Board to credit committees, underwriters and portfolio managers. 

In a recent webinar, you said that integrating sustainability and climate risk within the organisation is a “challenging but rewarding undertaking”. Can you elaborate?

Sustainability is a maturing and impactful, intrusive undertaking. Nobody can perform superbly on every stage at the same time, certainly not when the stage is still under construction. Sustainability and climate risk covers a wide area of topics, which themselves are not entirely carved in stone. Thus while integrating these factors requires a strong vision and focus on sustainability efforts, the organisation must also be agile enough to pick up new insights from e.g. science and politics.

It is a complex and dynamic field to play in, but the rewards are big and important: it is of vital importance for the long-term viability of the organisation, there are very attractive business opportunities to be explored and developed and last, but certainly not least, it is great to contribute as an organisation and as a global citizen to the sustainability of our economy and planet, however small that contribution may seem.

Grasping the opportunities in sustainability

Sustainability related regulation deadlines unfold amid an increasingly complex regulatory landscape. How can institutions align their key initiatives across projects, interdependencies and resourcing?

Regulatory deadlines are often seen as a distraction for delivery teams. However, they are as much a success factor for the organisation, as any other (often more commercial) objective. So how can existing capabilities and processes be leveraged towards regulatory change, and how can those deadlines become shared, integral goals?

In a normal, complex change programme, a high-level impact assessment is performed once initial requirements are understood. This allows (amongst other things) basic planning forecasts to be completed, dependencies to be identified and initial estimates to be collated. Regulatory change is no different – other than it is often made harder by the fact the deadlines pay no respect to the current status of internal projects. 

Integrating SCR in the organisation and grasping the opportunities is a challenging yet rewarding undertaking

The time taken to perform this impact assessment and provide the right level of information back to the relevant steering groups for prioritisation to occur, is often the first major weak point in the regulatory change lifecycle. Accelerating this step allows delivery teams to assess the changes required, provides early requests back to management for priority guidance, and ensures visibility for everyone on the overall regulatory roadmap. 

Once the regulatory activities have been defined, and activities have been embedded into the existing delivery programmes, it then becomes a challenge of monitoring execution tightly, highlighting risks to delivery dates early and often and ultimately evidencing compliance. None of these responsibilities are foreign to organisations experienced with change. However especially in today’s increasingly agile environments, these disciplines are often deprioritised in lieu of short-term focus and exploratory activity. For regulatory change, a strong backbone of project discipline is required, in order to stay in control. 

Organisations should play to their strengths and reach out for assistance to shore up any areas which are not at the right level of maturity. For the above challenge, adding in some experienced experts to help the organisation install the right governance, establish the right levels of orchestration, and then ensure these steps are embedded into the standard ways of working, can be a useful way to stack the odds in their favour.

Next week, on 24/09, Rudy van der Linden and Carola Steenmeijer are hosting the webinar 'Sustainability Risk Integration'.