LISA SCHEITZA | Research Associate, School of Business, Economics and Social Sciences, University of Hamburg
TIMO BUSCH | Professor, Chair for Management and Sustainability, School of Business, Economics and Social Sciences,University of Hamburg, and Center for Sustainable Finance and Private Wealth, University of Zurich
JOHANNES METZLER | Graduate, School of Business, Economics and Social Sciences, University of Hamburg

Sustainable investing has emerged as an established practice in financial markets, and it accounts for about one-third of global assets under management. Recently, impact investing, i.e., investing with the aim of contributing to real-world changes, has been receiving increasing attention. While the literature so far has focused on theoretical and conceptual considerations of impact investing, in practice it often remains unclear what the requirements of an actual impact investment are. 

Nevertheless, some investment products claim to achieve some form of impact. We investigate if this impact-claim is justified. We analyze 185 (so-called) impact funds based on an established classification scheme that outlines the requirements for factual impact investments. We find that only one-third of the impact funds meet the outlined impact requirements. The share is equally low for funds classified under Article 9 of the E.U.’s Sustainable Finance Disclosure Regulation (SFDR). When looking at the different asset classes, our results show that the share of funds that meet the requirements for impact-generating investments is higher for private equity and private debt than for public equity and bonds.

LAUREN FARRELL | Associate, Capco

In recent years, due to increasing awareness of the risks – and opportunities – provided by climate change, products marketed based on their strong environmental, social, and governance (ESG) credentials have exploded. In conjunction with this “gold rush” of new green products is the potential to misrepresent their true underlying nature; subsequently such claims made to consumers are not always credibly evidenced, which could lead to long-term legal ramifications. 

This paper introduces climate conduct and highlights ways in which products can be mis-sold through marketing. It further outlines the actions that regulatory bodies are taking to mitigate this, including the implementation of legislation and guiding principles for firms. Some risks and pitfalls for firms treading this “green-line” are given using case study evidence. Guidance is also provided for how firms should operate moving forward in this environment.

CATHARINA BELFRAGE SAHLSTRAND | Group Head of Sustainability and Climate Action, Handelsbanken
RICHARD WINDER | U.K. Head of Sustainability, Handelsbanken

Over several decades, banking has evolved into one of the most centralized sectors of the economy. So, what are some of the challenges and benefits of working with climate change and sustainability in a strongly decentralized bank? Catharina Belfrage Sahlstrand and Richard Winder take us behind the scenes at the Swedish-headquartered Handelsbanken.

FLORENCE ANGLÈS | Managing Principal, Capco

Growth is only sustainable if it preserves natural capital and integrates, beyond its economic implications, the environmental, social, and governance dimensions. It is a new social project advocated by the public authorities and which is applied at the corporate level through “corporate social responsibility” (CSR). Sustainability is gradually gaining ground and affecting the whole economy. As the intergenerational component of sustainable development emphasizes the objective of a long-term horizon, it is necessary to develop new instruments and mechanisms for financing the economy. 

Finance and sustainability come together to give rise to the so-called sustainable finance. Europe is the epicentre of sustainable finance. The lack of a clear definition has led the European Commission to work on developing a common classification or taxonomy. Environmental, social, and governance (ESG) concerns are at the heart of regulations in the financial services industry. Today, ESG is no longer just an acronym but a reality, expected to reach a third of assets under management worldwide by 2025. It is spreading across all asset classes, including the less liquid ones. ESG now defines the new frontiers of alternative investments.

ARMANDO CASTRO | Associate Professor, The Bartlett School of Sustainable Construction, University College London (UCL)
MARIA GRADILLAS | Senior Researcher, Department of Management, Technology and Economics, ETH Zurich

In a world where organizations are increasingly held accountable for the impact of their operations on the environment and society, environmental, social, and governance (ESG) reporting and metrics have emerged as the primary paradigm for assessing an organization’s sustainability efforts. Yet, it is an area with competing concepts, an ever-expanding set of measures and requirements, and a growing ratings and standards industry. 

In this article, we discuss how ESG initiatives and measurements can help organizations create value rather than merely being a compliance exercise. We do so by firstly, emphasizing the importance of ESG reporting and ratings for organizations, notwithstanding their limitations. Secondly, we highlight the need for transparency of the ESG metrics and activities being implemented by organizations and the priority of avoiding greenwashing risks. Finally, we stress the requirement of senior management involvement and accountability in ESG initiatives that create long-term value.

GEORGE GEORGIOU | Principal Consultant, Capco

In recent years we have seen the onus shifting onto financial services firms to implement structured methodologies and metrics to identify, assess, and validate their own environmental, social, and governance (ESG) credentials along with those of the companies they finance, invest in, or use as suppliers – in effect becoming the arbiters of sound ESG practices across global markets. Delivering that validation demands a deep-dive into data that encompasses both financial and non-financial activities in order to quantify positive or negative ESG-related impacts. 

However, the highly complex, interlinked, and global nature of the financial services industry means this is no easy task. Greenwashing, fragmented regulations, and diverse (and sometimes divergent) ESG measurement methodologies all clutter the pathway to clear and reliable ESG evaluations. This paper outlines approaches for assessing ESG data scoping and sourcing and sets out one specific approach/best practice for incorporating corporate ESG data strategies.

CAROLYN ALLWIN | Managing Principal, Capco
CAITLIN STEVENS | Senior Consultant, Capco
LINDSAY MOREAU | Social Impact Advisor

Human capital disclosures and diversity, equity, and inclusion (DEI) is top of mind for investors and companies given today’s social climate. Human capital management (HCM) disclosures are next on the SEC’s ESG agenda, and these disclosures will require companies to describe their human capital resources. Currently, both regulatory requirements and reporting frameworks and standards are not prescriptive when it comes to these topics, allowing companies flexibility in how they interpret and report their data. The proposed HCM rules are likely to be more prescriptive than existing requirements and could transform the kind of data companies disclose. Human capital management and DEI are significant components of ESG, and specific disclosures would support investors to make better-informed long-term investment decisions.

MARCUS FLEIG | Senior Consultant, Capco
VINCENT SCHROM | Associate, Capco

Using a reverse engineering approach, we seek to map the impact of the rise of ESG products along the trade lifecycle and the functional architecture of financial institutions. We find that ESG does not change the trade lifecycle per se but shifts the focus to the pre-trade phase due to regulatory and risk considerations, disclosure and verification of KPIs, as well as data management requirements. As a result, ESG provides an impetus to improve front office performance, integrate sustainability risk into the risk management, and credibly redirect capital flows to sustainable investments. 

ESG is thus a lever for synchronizing front to back office systems, particularly with respect to ESG-related client data gathering, rating tools, and downstream systems. Our analysis of the functional architecture shows a marginal impact on the throughput-relevant functions, however, the enrichment of different data models has to be ensured from the beginning in order to effectively serve the output-relevant functions, especially with regard to ESG-relevant functions like reporting.

RAKHI KUMAR | Senior Vice President of Sustainability Solutions and Business Integration,
Office of Sustainability, and co-chair of the Climate Transition Center, Liberty Mutual Insurance
KELLY HEREID | Director of Catastrophe Research, Liberty Mutual Insurance
VICTORIA YANCO | Sustainability Consultant, Liberty Mutual Insurance

Climate change poses an interconnected set of risks to the economy, from both the transition to a new mix of renewable energy sources and the physical hazards driven by a warming planet. The complexity of the upcoming transition requires a systems-level approach that leverages the strengths of existing modeling tools, paired with a strategy built on proactively identifying gaps and silos in out-of-the-box analytical solutions. Liberty Mutual brings a unique view from the insurance space on breaking down modeling silos, pairing the physical implications of climate disasters derived from catastrophe and climate modeling along with macroeconomic studies based on research from the Network for Greening the Financial System (NGFS). 

This paper details the challenges presented by this current climate risk modeling environment and suggests practical strategies for making climate risk actionable as organizations plan their transition to a low-carbon future. We find a clear mismatch between the disparate and path-dependent energy transitions expected across global economies and common climate commitments found in the financial services sector, which risks unintended adverse effects in the speed
and equity of the climate transition. Developing a holistic view of climate impacts that ties physical, economic, social, and biodiversity impacts together and places them at the point of decision-making is a strategy that is broadly applicable both within and beyond the insurance sector.

AUGUST BENZ | Deputy CEO and Head Private Banking and Asset Management, Swiss Bankers Association (SBA)
ALANNAH BEER | Sustainable Finance Associate, Swiss Bankers Association (SBA)

Who, or more specifically which jurisdiction, leads the way in sustainable finance? To answer this question, this article aims to define the requirements for a leading center of sustainable finance, explains why Switzerland is in a position to meet them, and sets out what proactive measures the industry has taken in support of this initiative. There is still room for further development going forward. It is also important to embed sustainable finance in a broader context and to keep in mind that, while sustainable finance is a key driver of sustainability, it ultimately cannot solve everything.

EDWIN HUI | Executive Director, Capco
SHELLEY ZHOU | Managing Principal, Capco

Global greenhouse gas emissions and worries about climate risk are continuing to drive environmental, social and governance concerns to the top of the global business agenda, with emerging market and developing economies increasingly under the spotlight. These economies represent two thirds of global CO2 emissions, with China alone accounting for one third, and will generate the bulk of the growth in future emissions. Their actions on climate change will determine if the global 2050 net zero target can be met. In turn, APAC financial institutions, as pipelines of capital in the region, have become a critical factor in the success of climate change action and related ESG initiatives. 

This paper explores some key questions faced by financial institutions with an APAC emerging markets focus: how ready is APAC emerging markets for the transition, in the light of the most recent climate commitments brought about by COP26; how can financial institutions establish a net zero strategy for decarbonizing portfolios that is science-led, robust and verifiable by investors and regulators; and what are the implications for establishing robust ESG data strategies and the technologies that support them?

MARINA SEVERINOVSKY | Head of Sustainability – North America, Schroders

It is important for asset managers to engage U.S. investors in the sustainable investing conversation in a way that will resonate with them. Across geographies, the political spectrum, and generational cohorts, the asset management industry can seek to meet American investors on their own terms, in relation to their objectives and priorities. From a risk mitigation standpoint and from the perspective of capturing better long-term returns, we believe U.S. clients, no less than those in other regions, can benefit from having ESG considerations integrated into their investments.

MINETTE BELLINGAN | Representative Director, CPLB
CATHERINE TILLEY | Lecturer in Business Ethics & Sustainability, King’s Business School

Every year, major brands commission hundreds of social audits to check conditions in their supply chains. Yet, unsafe or unethical labor practices persist. Work to address this problem has tended to focus on developing a framework for social sustainability or creating ever more different audits, codes of conduct, and checklists, rather than engaging with the people affected by working conditions – the factory workers themselves. In this article, we review a case where digital diaries were used to understand what matters to factory workers, considering how our insights might be used to improve the quality of social audits.

SARAH BIDINGER | Senior Consultant, Capco
LUDOVIC ZACCARON | Consultant, Capco

If there is one buzzword that current strategic discussions across all industries have in common, it is ESG. Even though sustainable investments initially started as a niche investment class, they are slowly reaching mass adoption. While environmental concerns like climate change previously seemed to be non-urgent, COVID-19 rewrote that narrative, and we are observing a massive disruption in public consciousness. With the wealth transfer taking place, demand for sustainable investments skyrocketing, and regulations and public scrutiny tightening, banks are under immense pressure to steadily fulfill growing demands for ESG products. However, this flight to green is increasingly considered as a cause for concern.

The “why” in relation to ESG is undebatable, we now need to focus on the “how” – or rather “how not to”. This is where greenwashing comes into focus. Based on recent large-scale scandals, it has become apparent that greenwashing can occur across the full investment value chain. Due to lack of global cooperation and adoption of what is really considered sustainable, greenwashing can be committed intentionally or unintentionally, if there is lack of proper due diligence at product, company, and/or point of sale level. 

This article provides a framework for greenwashing prevention through the five key pillars of strategy, target operating model, governance, risk management, and data and reporting. Ultimately, key guidelines are provided to help financial institutions avoid the greenwashing trap, no matter where they are on their individual ESG journeys – be they laggards or frontrunners.

JASON SAUL | Executive Director, Center for Impact Sciences, Harris School of Public Policy, University of Chicago,
and co-founder, Impact Genome Project
PHYLLIS KURLANDER COSTANZA | Former Head of Social Impact, UBS, and CEO, UBS Optimus Foundation

In this article, we argue that there is a need to move away from the outdated ESG regime that focuses on external risks for a corporation to one that addresses intrinsic issues that can have positive commercial and societal impacts. The current ESG inputs reflect administrative data points or checklists that align with socially responsible standards, policies, and codes of conduct. However, when corporations focus on societal impacts that are intrinsic to their business, ESG can be a powerful predictor of financial return. The future of ESG depends on producing a new generation of ESG 2.0 data that reliably measures the link between societal impacts and corporate intrinsic value. To get there, three key innovations are needed:
(1) adoption of a standardized taxonomy of societal impacts, (2) establishment of an ESG 2.0 “intrinsicality” map, and (3) extension of measurement, reporting, and verification (MRV) to “S”.

DAVID HARRIS | Global Head of Sustainable Finance Strategy, London Stock Exchange Group
ARNE STAAL | Group Head of Indexes and Benchmarks, London Stock Exchange Group, and CEO, FTSE Russell
SANDRINE SOUBEYRAN | Director in Global Investment Research, FTSE Russell, London Stock Exchange Group

Passive investing and sustainability engagement were historically deemed to be at best challenging, at worst incompatible. There is a growing realization that combining index investing and sustainability engagement is not only possible but can reinforce and mobilize significant global assets under management to enable collaborative engagement. By linking engagement to transparent capital reallocation, passive investing has the ability to influence and achieve changes in corporate practices and strategies, leading to real world impact. This paper explores the evolution of ESG engagement and passive investing and demonstrates that sustainability index design can lead to scalable, efficient, and impactful corporate engagement across entire markets. The use of such indexes to steer investment flows provides clear incentives for companies to improve sustainability performance and deliver outcomes sought by asset owners and society at large. 

IGOR FILATOTCHEV | Professor of Corporate Governance and Strategy, King’s College London
CHIZU NAKAJIMA | Professor of Law, Institute of Advanced Legal Studies, University of London and ESG Integration
Research and Education Center, University of Osaka
GÜNTER K. STAHL | Professor of International Management, and Director, Centre for Sustainability Transformation
and Responsibility (STaR), Vienna University of Economics and Business (WU Vienna)

Building on research on corporate social responsibility (CSR) and institutional theory, this paper explores firms’ perspectives on and approaches to the “S” (the social responsibility dimension) of the ESG framework in different institutional and organizational contexts. Building on studies grounded in institutional and organizational theories we argue that the scope and effectiveness of S strategies may differ depending on the legal system and institutional characteristics in a specific country. Our discussion suggests that researchers need to develop more holistic, institutionally embedded research frameworks to analyze organizational approaches to ESG.

KRISHNA UTTAMCHANDANI | Associate, Capco

As ESG assessments begin to evolve towards an industry standard, financial institutions and their investment approaches find themselves under the microscope of the public and regulators. As a result, a common debate has arisen between the “right” approach of divestiture versus those of engagement. Though there are proponents for both sides, this paper seeks to outline the benefits of, and propose solutions for, engagement, allowing financial institutions to steward the progression to a healthier ESG outlook. Given the surge in ESG stewardship and active ownership, it seems likely that governing regulatory bodies will begin to mandate, and perhaps regulate, active ownership policies; taking action in advance of these mandates will better position financial services for a socially and environmentally equitable future.

YLVA BAECKSTRÖM | Senior Lecturer in Banking & Finance, King’s Business School
JEANETTE CARLSSON HAUFF | Senior Lecturer, School of Business, Administration and Law, University of Gothenburg
VIKTOR ELLIOT | Senior Lecturer, School of Business, Administration and Law, University of Gothenburg

Philanthropy has a long-standing tradition among wealthy individuals. Their donations have the potential to make important positive contributions to a range of causes. We argue that the philanthropic efforts made by this powerful demographic in part correspond to the common definition of environmental, social, and governance (ESG) or sustainable investment practices more broadly. The wealthy, therefore, cannot be overlooked when we think about sustainable investing. We describe the philanthropic attitudes and giving behavior in a sample of 417 wealthy individuals with at least U.S.$5.5 million to invest. We focus on the motivations behind their donations, and more specifically giving to environmental causes, can inform sustainable investment intentions. Our findings are relevant to the wealth management industry that seeks to increase its understanding about this demographic and for organizations as they develop their ESG strategies.

VINCENT TRIESSCHIJN | Global Head ESG and Sustainable Investing, ABN AMRO Bank N.V.1
ERIC ZUIDMEER | Senior Advisor Private Equity, ABN AMRO Bank N.V.

The European Union’s Sustainable Finance Disclosure Regulation2 (SFDR) aims to make the sustainability profile of investments better understood by end investors. The extent of required product-level disclosures depends on the sustainability profile. The SFDR defines three different potential categories for products, depending on their sustainability profile and the characteristics defined in Articles 6 (non-ESG), 8 (ESG promotion) and 9 (Sustainable Objective) of the SFDR. SFDR applies to “financial markets participants” including Private Markets and Private Equity Fund Managers or General Partners (“GPs”).

According to our experience from stakeholder conversations, GPs generally embrace ESG, if not for intrinsic (perhaps altruistic) motivation, then certainly through the lens of value creation, i.e., companies acquired today should become more sustainable in order to be sold successfully in the future. This paper provides an insight into the growing expectations of our stakeholders on ESG and sustainability and conversations with third parties in the Private Markets investment space.

TENSIE WHELAN | Clinical Professor for Business and Society and founder and Director, Center for Sustainable Business,
Stern School of Business, New York University
ELYSE DOUGLAS | Senior Scholar, Center for Sustainable Business, Stern School of Business, New York University
CHISARA EHIEMERE | Senior Research Lead, Return on Sustainability Investment (ROSI™), Center for Sustainable Business, Stern School of Business, New York University

Managing for the material environmental and social issues affecting business today requires new strategies, practices, and tools. Our research explores how to best understand and track the financial return on sustainability investments, to assist companies with their decision making, and improve their bottom-line as well as their societal impact. In this article, we explore the strategies and benefits associated with sustainable agriculture and provide case studies of how companies and farmers have benefited from sustainable sourcing, biodiversity protection, water conservation, and regenerative agriculture practices. We see consistent benefits in the form of operational efficiencies, risk mitigation, innovation and growth, customer loyalty and sales, employee retention, and productivity, amongst other drivers. In fact, sustainable business practices throughout the value chain could be characterized as driving the next wave of total quality management, and the methodology can be useful to most industry sectors.

VERONIQUE J. A. LAFON-VINAIS | Associate Professor of Business Education, Department of Finance,
Hong Kong University of Science and Technology

The sustainable finance market has expanded rapidly in the past 10 years, from a fringe “movement” to a sizeable market providing significant financing and investing opportunities. We provide a definition and overview of the sustainable finance markets and seek to understand the process by which traditional financial products and instruments can be financially engineered to become sustainable finance products; through two main avenues: use of proceeds and performance-based pricing. We provide some recent examples of innovative structures and conclude by showing that the sustainable finance market will continue to develop once solid foundations have been set.

ROLAND A.J. MEES | Professor of Practice of Business Ethics, University of Groningen and Director of Sustainable Finance,
ING Wholesale Banking

Since the introduction of the “sustainability-linked loan” (SLL) in April 2017, the market for this lending product has grown significantly. The SLL is a loan where the interest margin is linked to the sustainability achievements of the borrower. If the borrower improves its sustainability performance, the margin decreases, and vice versa. 

This article provides an overview of the features of the product, currently offered by over 500 banks worldwide, including real life examples of SLLs. It highlights market developments (quality standards for SLLs, product diversification, and growth of the syndicated SLL market) and it discusses how the risks of greenwashing that come with this product can be mitigated. The risks of greenwashing are high, which means that the parties involved will have to make a greater effort to maintain the integrity of the SLL product.

We conclude with some reflections on the kind of commitment by corporates and banks that is required for keeping up the integrity of the SLL, a type of loan which is intended to contribute to the goals of the Paris Agreement and the net zero targets that many companies and banks have stated in public.