Expertise and streamlined, effective processes will be key to successful operationalisation of ESG.
People are a key component to successfully integrating ESG. Training investment teams to advise on ESG-related products will increase customer access to sustainable finance and analyst insights into a poorly understood space. There is a growing consumer appetite for ESG-related products. In a recent study of asset managers, 38% of respondents think that a stronger focus on ESG factors in their investment approaches will improve returns.1 By training Front-office teams, FIs can meet customer demand for ESG-aligned assets and potentially gain increased wallet over rivals who have delayed their ESG integration.
In the back office, incorporating ESG into existing processes as opposed to independent checks can generate efficiencies and avoid fragmented procedures. There is a strong overlap between ESG and CDD/KYC practices for the collection of data. Subsequently, ESG risk analysis can be integrated into every stage of the risk management framework by uplifting the due diligence process with ESG requirements, resulting in a more holistic risk model.2 This will allow FIs to identify potential risks and mitigate them through exclusion policies or adapted risk premiums.
Collecting ESG related information in an independent process can be time-consuming and costly due to the difficulties in obtaining accurate data. Instead, existing CDD/KYC data can be reused, and teams upskilled by enhancing their training for specialist/complex clients, with ESG-MLRO type teams who deal with escalations. The depth of the process integration is entirely up to FIs. The most optimal operating model is still a matter of active discussion and it’s likely that a tailored ESG approach is required for each organisation due to the differences in structure and strategy.
The below scenario is an amalgamation of several client challenges and experiences.
Minterra (an assumed name) is a corporate bank operating in France. They have a strong CLM operating model that manages KYC for their clients. However, with the impending Corporate Sustainability Reporting Directive (CSRD), they recognised the need to determine their ESG policy and operationalise that within the organisation.
As not all Minterra’s clients are in scope of CSRD, they implemented scoping logic to assess the applicability of the regulation during onboarding. The Task Force on Climate-Related Financial Disclosures (TCFD) standard – with some tweaks – was applied to all clients, new or existing. They also leveraged a market data provider who specialises in ESG to optimise efficiency.
Ultimately ESG became a part of CLM that exists alongside KYC and regulations. By digitising processes and consolidating their operating model, they were able to maintain a high level of customer service while delivering regulatory compliance for the bank, and a deep understanding of the ESG performance of their client base.
This blogpost was written in collaboration with Aurora.
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1 PwC ESG Transformation July 2021
2 Six key challenges for financial institutions to deal with ESG risks