Evgeny Turin, Head of ESG Finance and Corporate Bank FP&A, Deutsche Bank was a speaker at our recent ESG Europe Summit.

The views and opinions expressed in this article are those of the thought leader as an individual, and are not attributed to CeFPro or any particular organization.

What are the impacts of the current geopolitical environment on sustainability paths?

Compared to the prior year, 2022 was marked by lower levels of sustainability activities as companies prioritized their responses to the macro-economic and geo-political uncertainty. In particular:

• Lower financing volumes reflected a rising interest rate environment, generally constraining lending and refinancing
• Lower issuance volumes reflected volatile conditions in the global capital markets and reduced primary issuance activity
• Lower assets under management resulted from negative market developments in stock and bond markets

How can financial institutions look to manage both short- and long-term planning? 

For us, ESG reporting is about much more than reporting; it’s a catalyst for change. Following standards of reporting help to balance both short- and long-term priorities:

• Granularity: reporting going down to the business and sub-business level. This enables holding each business, sub-business, and individual manager accountable for results
• Frequency: sufficient frequency of sustainability reporting enabling setting near-term targets that instil a sense of urgency and create near-term momentum
• Rigor and selectivity: clearly defined boundaries for sustainable reporting, transparently specifying what is in scope, and what is not. Independent verification process, including independent control functions working around a transparent and public framework
• Alignment: aligning to international norms and standards links the EU Taxonomy, the United Nations’ seventeen Sustainable Development Goals (SDGs)
• Holistic approach: not only advising clients on their pathway to Net Zero, but also holding oneself accountable to own 2050 Net Zero ambition
• Link to compensation: changing behaviours by linking incentive-setting and senior managers compensation

Why are innovation and diversification strategies important for financial institutions?

Sustainability is one of three key themes of the decade along with macro-economic uncertainty and technology:

• Changes in the macroeconomic environment will materially impact corporates, investors, and also public finances
• Rapid technological progress in all areas presents opportunities, but also poses big challenges to our clients
• And finally, the climate crisis is forcing transformation to a sustainable economy

The World Economic Forum’s Global Risk Report highlights a number of risks that are closely related to climate change, environmental degradation, and social challenges, all impacting the economic developments over the next decades. All this needs action by policymakers, governments, regulators, and the private sector. But banks can be a part of the solution in several ways:

• Providing capital and supporting their clients’ transformation with strategic advice
• Leveraging their risk management capabilities for clients
• Measuring and monitoring the impact of their actions on the environment and society
• Supporting the development of reliable standards and implementing them

Important to note that running business in an environmentally sound, socially inclusive, and well-governed way is not only a responsibility – it is actually also an opportunity. Positioning as a clients’ first call bank might help banks gain market share and grow stronger than the overall industry.

What, for you, are some of the key regulatory challenges to consider in long term planning?

• First, co-existence of multiple standards. The global landscape is extremely fragmented. The challenge is that there is no globally accepted unified legal framework to determine what is sustainable, and the multiple standards that exist are not aligned
• Secondly, practical challenges to application. In theory, the criteria may seem logical, but applying them might be complex in practice. Some rules are principle-based, but there is a challenge with interpretation. Others, like those set by the EU Taxonomy, are based on technical screening criteria and pose a data challenge
• Finally, the limited scope of available definitions. For example, the EU Taxonomy in its current form, focuses on climate objectives only. With 13 sectors covered, the overall sectoral scope is rather limited, so many companies may find that none of their activities are eligible under the EU Taxonomy, despite them having well-established sustainability credentials.

This is why many banks are developing their own standards and frameworks, aiming to cover all clients including in those sectors, economic activities, and geographies, where the definitions are still less well defined.