ESG PERFORMANCE Enabling the sustainable transformation of financial institutions - Capgemini
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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
55% Climate
UP TO
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
11Embrace 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.
12Orchestrate 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;
13DATA 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.
15GET STARTED
16Given 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 relevant objectives, related metrics, align processes and external communication
STRATEGY
EMBED ESG Credit value chain Investment value chain
PERFORMANCE Develop ESG-specific products, update Develop ESG-specific products 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
17AUTHORS 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
18About For more details contact:
Capgemini Invent Dalia Bahous
Managing Consultant
As the digital innovation, consulting and transformation brand of the dalia.bahous@capgemini.com
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 julien.garnier@capgemini.com
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
rob.van.dijk@capgemini.com
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
noemie.lauer@capgemini.com
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. peiyao.liu@capgemini.com
The Group reported in 2020 global revenues of €16 billion.
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