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Kamran Khan, Deutsche Bank’s head of ESG for Asia Pacific, urged the financial services industry to step up its game and take responsibility for its use of ESG and net-zero labels.
At a time when the possible ramifications of greenwashing practices multiply rapidly, Khan said there is a growing need to put a “reality check” and impose the authority of “saying no” to colleagues or clients trying to misleadingly attach the ESG label to their products.
“When you look at it, any company can make a net-zero commitment, and come up with a nice little PowerPoint on how they’re going to move from today to 2030 or 2050,” Khan said at a Sibos 2021 panel on Thursday.
“But I think there is a responsibility for the financial services industry to put a reality check there.
“I say ‘No’ on a regular basis,” Khan admitted, “to my own colleagues who want to call something ESG because it sounds good, and then to clients.”
The Deutsche Bank’s executive raised concerns around banks allowing “a certain transaction to happen in the name of net zero” even when that isn’t the case.
In the absence of “hard reporting requirements around it” or “penalty for the issuers to then change their mind or delay their actions,” Khan said, “we may all have on paper a very good, nice model to get us to net zero,but […] the globe is not going to get any better.”
“So I think that ability to say ‘No’ is very, very critical. I think that will define the brands. And that will define quality.”
Khan’s warnings echo the similarly tough stance expressed by former Bank of England’s Governor Mark Carney yesterday, as he said firms that fail to effectively integrate sustainability into their business model will be hit by lower market valuations.
Forward-looking data and baselines
In the past few years, firms have been under added pressure to disclose ESG data to fulfil the non-financial reporting requirements of the investors. This data is used by the investors to identify material risks, sustainability risks, and growth opportunities before working with any firm.
At present, firms’ ESG reporting would also include more forward-looking data that shows the picture of how firms are going to achieve their ESG goals in the decades to come.
However, forward-looking information remains purely based on non-measurable estimations and assumptions, which could pose some critical risks, panellists at the Sibos conference warned.
Sherry Madera, chief industry and government affairs officer at London Stock Exchange, pointed out that forward-looking data is difficult to verify and imposes risks of “extrapolation, estimation, and errors.”
“When we’re looking at forward-looking data, it is very different. It’s difficult to verify, especially in a fast-moving environment, when even things like regulatory change, understanding and mapping how that might work is difficult.”
Richard Lacaille, executive vice president and global head of ESG at State Street Bank, said that nascent industry-led standards on forward-looking data may mark some useful progress towards standardising the way companies account for future ESG impacts.
However, their efficacy and reliability will hinge on appointing independent boards to supervise them, he said.
“I think there are standards that are emerging about how you describe your pathway of decarbonisation. [These] voluntary standards [are] a sort of lingua franca of forward-looking information.
“But I think at the heart of it is the credibility of [a company’s] board – we need a strong, independent board to oversee disclosures and information.”
To work with forward-looking data, regulators are trying out stress-testing and prudential regulations.
Elree Winnett Seelig, global head of ESG for markets and securities services at Citi, said the bank is being asked to begin identifying and managing the necessary stress testing.
“We just completed a project for one of our regulators looking at climate risk in our balance sheet and trading books for one of our legal vehicles,” she explained, “And it’s really complicated, because you need to bring together climate science with climate economics with that financial materiality.”
Winnett Seelig said laying out baseline data will be an essential step in enabling a more rigorous use of forward looking data.
“We need to establish those baselines for the companies and then set forward-looking plans that they should be disclosing.”
Khan added baseline data is a precondition for broader ESG data accuracy and investor protection.
“If we don’t have the baseline […] we don’t have the underlying setup,” he said, “nothing that the asset vendors can do afterwards will protect them.”
Winnett Seelig agreed: “if we think about banks and asset managers and investors […] effectively integrating ESG or net zero, we need that information of the material ESG factors that really nobody has been reporting before.
“So that starts with identifying what’s material to the sector and company and establishing the baselines for where the firm is now. Then, with the annual reporting of those metrics, we start building up the time series […] so that we can understand the momentum,” she said.
This would allow investors to analyse companies’ performance against the sustainability targets and against their peers, she said.
Meanwhile, ESG data should also provide better granularity.
Khan pointed out that “a little bit more granularity around data” was needed for regulators to be able to appraise assets’ and investments’ sustainability profile.
Madera added data sets needed to be more “defined” and “granular” before they could be standardised.
“We are a long way away from the granularity that we might need on, for example, water consumption – or thinking about some of the other circular economy metrics that are coming out.
“In order to move towards a standard, let’s get some of those data sets even more defined, and created so that the regulators can look at them and use them effectively,” she said.
Additional reporting by Anna Brunetti
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