Sustainability is THE challenge of our time – also in the financial services sector. At the same time, the volume of sustainable investments is still low and there is no uniform understanding of what is meant by the term ESG, i.e. Environment, Social and Governance. Is the excitement surrounding the issue justifiable?
MARKUS THIESMEYER: Still, no one can describe it in concrete terms, and yet it is the elephant in the room. Elephant is an understatement in this case. The demands for sustainability will permanently change the way we live and the three letters – ESG – will permanently change the way funds are assigned. We all know that ESG regulation is currently being built up on a massive scale, but at the same time it is still in its infancy.
Let’s just take the ESG disclosure ordinance that went into effect this month. It obliges sustainable aspects of financial products to be disclosed. However, the technical standards of the regulation are lacking. Indeed, these are crucial for classifying the sustainability of financial products. First of all, it is unclear what data is gathered and how, and secondly, there is a huge need for data. Almost everyone has to start from scratch – this applies to the financing of companies as well as cars or homes. And as always – everyone really should have started collecting this data yesterday. While the answer to the question “When is the best time to plant an apple tree?” is yesterday, the second best time is now!
With the Taxonomy Regulation, the EU has already presented a set of rules. Isn’t that enough of a basis?
On the one hand, the Taxonomy Regulation is too restrictive and detailed. On the other, it is currently still very much focused on the environment, i.e. the E of ESG. And even here, only 10 out of 70 industries are included. S and G are to be added later. Applied to a bank’s exposure book, the traffic light would be green in only two to three percent of cases. About five percent of the cases would be red, such as funding gambling. This still leaves over 90% of the stock which the Brussels taxonomy does not apply to. Keeping with a traffic light logic: therefore the traffic light is yellow for nine out of ten loans. And that is the crucial question: how are these cases, which range from light yellow to dark yellow to be treated? Especially from the point of view of bridging technologies; how, for example, is a gas-fired power plant to be evaluated or a car with an internal combustion motor that fulfills the latest energy and environmental standards?
Our zeb approach is to focus on the key ESG indicators. We recommend using no more than ten indicators – depending on the business, preferably three to ten. We have examined taxonomy in a specific customer case with six banks and tested it for practicability. To give an example: at a bank with 30,000 business customers, 300,000 data points were collected to cover just the most important ten indicators.
And this is not a one-off task, but must be continuously updated. After all, it is not a question of managing a singular feat of strength, but of establishing a system that works on a lasting basis. Therefore, only what is absolutely necessary should be collected in order to be able to identify the probability of default at an early stage.
Aren’t the additional regulatory requirements placing a considerable burden on companies, private customers and credit institutions – and this at a time when the profitability of German banks is not particularly good?
Counter question: what is the alternative? We have had ample examples in recent months of what can happen when governance does not work adequately. The Fukushima nuclear disaster just had its tenth anniversary: an example of how suddenly the general acceptance for an entire technology can go out the window. Or just look at the Supply Chain Act (German: Lieferkettengesetz), for example, which affects social aspects. Sustainability is THE challenge of our time that we have to face. Regulators should therefore not base their arguments for the latest ESG initiatives solely on the objective of banking system stability.
But yes: additional regulatory requirements also mean additional work. Data must be collected, processed and reported. This must be done efficiently and smartly. Chatbots can be used to determine customer interests or to record the knowledge and attitudes of employees in a real-world manner. Another topic that everyone is talking about is artificial intelligence. We use AI to extract valuable information from existing data on banks’ business customers for the ESG criteria.
The good news is that analysis to date suggests that sustainable investments are also more profitable investments. At zeb, we therefore do not regard ESG as a burden but as an opportunity – also and above all for a new business and operating model.
We focus on a few, but decisive criteria, keep an eye on the profit orientation and thus present our customers with real added value.
One thing is absolutely clear: sustainability is not just a new trend, but hopefully will bring about a new normal very soon.