Heightened Regulatory Focus on ESG
On Thursday 26 August, Deutsche Bank AG’s asset-management arm DWS Group, plunged down in the stock exchange market after authorities in the US and Germany started an investigation into claims that it had inflated the credentials of many ESG-labeled investment products.
Germany’s Federal Financial Supervisory Authority (BaFin), an autonomous public-law institution subject to legal and technical oversight of the Federal Ministry of Finance in Germany and DB’s local financial markets regulator, as well as US prosecutors, are following an investigation into claims made by DWS Group’s ex-sustainability chief, Desiree Fixler, regarding assets claimed to have been screened for ESG criteria when in reality this was not the case. DWS denied all allegations.
After the details of this investigation broke in the news, DWS Group’s stock price went down 13.7% in the matter of hours. This slump was the biggest for the company since last March (after the COVID19 crisis hit financial markets). DB’s stock price went down 2.3% that same day in Frankfurt.
In Europe alone, the asset management industry has had to remove the ESG label from an estimated $2 trillion in assets between 2018 and 2020. Europe’s Sustainable Finance Disclosure Regulation (SFDR) imposes mandatory ESG disclosure obligations for asset managers and other financial markets participants with substantive provisions of the regulation, effective from 10 March 2021. The SFDR was introduced by the European Commission alongside the Taxonomy Regulation and the Low Carbon Benchmarks Regulation as part of a package of legislative measures arising from the European Commission’s Action Plan on Sustainable Finance. The SFDR aims to bring a level playing field for financial market participants and financial advisers on transparency in relation to sustainability risks, the consideration of adverse sustainability impacts in their investment processes and the provision of sustainability related information with respect to financial products.
So, what is the takeaway from these events? It seems clear that ESG is more than just a marketing exercise and greenwashing is no longer a sufficient strategy in the financial services industry. BaFin’s intent on making this incident reasonably public was certainly no coincidence. It’s actions intended to make a statement towards the financial services industry: we are serious about ESG. We can expect similar scrutiny from other regulators in Europe and around the world as ESG comes more into focus of regulatory audits.
For financial services institutions this is a clear sign to act now, put the right processes in place and potentially review adequacy of the status quo. The business case on investment in ESG risk technology has clearly just changed - with higher cost of non-compliance and high reputational cost associated with being caught on the wrong foot.
Alyne’s ESG Risk Management Process
Alyne has combined its powerful Risk Analytics and Assessment capabilities with expertly-curated ESG content. This provides a cutting-edge ESG Governance, Risk and Compliance (GRC) capability to enterprises. Apply this approach from the beginning of your ESG program, right through to a fully quantified ESG Value at Risk.
Alyne’s ESG Risk Framework
The Alyne ESG Risk Framework consists of 16 ESG Megatrends. These have been further broken down into 95 additional sub-trends. This structure contains more than 300 individual data points.
- Climate Change
- Environmental Pressure
- Future of Work
- People and Values
- Democracy and Politics
- Privacy and Cyber
- Resource Scarcity
- Technology Advancement
- Shifting Economic Powers
- Poverty Reduction
- Digital Power Concentration
- Digital Inequality
- Human Rights
- Travel & Mobility
Mapped ESG Frameworks
While no single framework has emerged as an industry standard, there are different relevant classifications and approaches. Firms are expected to follow the recommended disclosures to the extent that is necessary for all stakeholders to understand their ESG position, development and performance. As a result, we have selected three key standards to map the Alyne ESG Risk Framework to, to support corporate reporting based on these standards or classifications.
1. United Nations 17 Sustainable Development Goals
The United Nations have agreed on 17 key goals for sustainable development. These are to be reached by the year 2030. The 17 Sustainable Development Goals or 17 SDG were agreed in 2015 and serve as a good structure for analysing risks. Some organisations are guided by the structure for their reporting. On its own, the UN SDG is not a complete ESG framework to assess risks, however the enrichment of it through the Alyne Framework adds considerable value.
2. Sustainability Accounting Standards Board
The Sustainability Accounting Standards Board (SASB) has built an extensive framework of ESG risks. These are further broken down by individual industries. The focus is on measurability and comparability for sustainable finance decisions and accounting. The breadth can be overwhelming, but the structure is certainly helpful. We have mapped the SASB Materiality Dimensions and the General Issue Category to the Alyne ESG Risk Framework.
3. EU Sustainable Finance Taxonomy
The European Union Regulation 2020/852 on the establishment of a framework to facilitate sustainable investment has published a taxonomy. It is widely followed in the ESG sustainable finance industry. Article 9 of the act identifies six core environmental objectives:
- Climate Change Mitigation
- Climate Change Adaptation
- Sustainable Use and Protection of Water and Marine Resources
- Transition to a Circular Economy
- Pollution Prevention and Control
- Protection and Restoration of Biodiversity and Ecosystems
To learn more about Alyne’s ESG capabilities take a look at all our supporting content here: from the latest episode of our talk show Morning Coffee to a fully dedicated White Paper and recent episodes of our podcast The RegTech Report.