Sustainable finance: mandatory, but also a strategic opportunity

Sustainable financial sector

Many Dutch financial institutions see opportunities in sustainable finance, but implementing it in actual practice often remains problematic. Banks, insurers, asset managers, and pension funds that now express the strategic aim of being a leader in sustainable finance can position themselves as front-runners in the sustainable financial sector of the future.

Sustainable finance deserves top priority

“During this crisis, we emphatically want to be part of the solution”, cried the Dutch banks when the seriousness and extent of the corona crisis started to become clear. This type of response led to a great deal of recognition from society.

That same spirit of willingness is demanded not just from banks, but also from insurers, asset managers, and pension funds in response to the climate crisis. Indeed, the EU is forcing financial institutions to become part of the solution in its efforts to be the world’s first climate-neutral economic bloc by 2050. Without the private financial sector, that goal cannot be achieved. Sustainable financial institutions play an essential role in directing investment towards a climate-neutral, green, inclusive, but also competitive economy.

What is sustainable finance?

In its recently published Taxonomy Report, the EU’s Technical Expert Group on Sustainable Finance needed more than 650 pages to explain the need for sustainable finance. The report describes the methodology and criteria for classifying sustainable investments. Clarity is intended to help put an end to the jumble of classifications and ratings – the fifty shades of green – that are currently utilised. It must no longer be possible for a company to be classified as highly sustainable by one rating agency but as substandard by a different one. “Greenwashing” – i.e. cleverly polishing up investments so as to make them look green even though they aren’t – also needs to be made more difficult. To be practical, we can define sustainable finance for now as any kind of financial investment that takes account of the criteria for Environment, Society, and good corporate Governance (the “ESG criteria”), i.e. full-scale integration of those criteria into the entire investment chain of the financial institution. “Doing good” thus becomes the new standard, by excluding companies that exert a negative impact and facilitating those that make a positive contribution to both the environment and society.

Sustainable finance offers opportunities for financial institutions

Publication of the Taxonomy Report represents an important breakthrough. There is now a legal basis for the EU to compel financial institutions to report on and account for the sustainability of their investments. The transparency offers institutions the opportunity to distinguish themselves from others when it comes to: 

•  Products and services
  Regulation relates only to the investment side. What portion of the investment portfolio can already be categorised as “green”? For what portion is the data lacking? And what portion is quite simply not green? It’s expected that within five years the regulations will also apply to loans and services.
  
• Risk management
  What are the ESG risks that a financial institution is exposed to? How are these risks managed– from customer acceptance to assessment and modelling, monitoring, reporting, and external publication – integrated into overall risk management? And is it clear what the impact is on the business?
  
• Rapports and explanations
  Are financial institutions able to comply with the obligation to publish the classification of their sustainable investments?

These examples provide customers and stakeholders with clarity around which institutions sustainably finance and which don't meet their requirements.

Make choices

Whether it’s new products and services, risk management, or reports and explanations, financial institutions face a number of highly significant questions. Do we see opportunities in developing a truly sustainable profile and do we dare to express strategic aims in the field of sustainable finance? When it comes to sustainable finance, do we accept the position of being just a follower? Will we simply follow the rest of the market, or do we want to lead the way?

Take control of sustainable finance at management level

I firmly believe that it’s essential for financial institutions to make deliberate choices regarding their level of ambition. And in order to make the right choices, we need to understand what’s involved in every aspect of the business. What consequences will those choices have for your organisation, employees, customers, products, services, systems, and processes? In the Netherlands – and by the way also in Scandinavia – I see a strong willingness to give meaning to sustainable finance. Many Dutch institutions see opportunities in sustainable finance and really want to move forward, unlike neighbouring countries, which tend to see it as something obligatory (i.e. only compliance) that has to be implemented by order of “Brussels”. The problem, though, is that our positive attitude is still hard to convert into a specific approach in actual practice. For example, at none of the biggest financial institutions is anybody fully responsible for sustainable finance at C level, i.e. the level where it should belong in view of its impact and urgency.

Sustainability doesn’t come at the expense of financial returns

I hope we can help financial institutions by providing insights to make deliberate strategic choices regarding sustainable finance. In the coming period, we will highlight various topics, such as a benchmark for the current strategic choices made by institutions, a detailed assessment of the new compliance requirements, and the issue of how ESG aspects can be integrated into the various components of risk management.

We're committed to helping financial institutions that want to be part of the solution. Anyone who knows me, understands that for me this goes far beyond just meeting the set requirements. After all, there are wonderful opportunities to be seized. Clients – whether they are students opening their first current account, hedge fund activists, or the world’s biggest institutional investors – are increasingly demanding sustainable solutions. We can totally dismiss the idea that sustainability comes at the expense of financial returns: scientific studies have convincingly demonstrated that where investment is concerned, returns and a long-term focus go hand-in-hand. Banks, insurers, asset managers, and pension funds that now express the strategic aim of being a leader in sustainable finance can therefore position themselves as winners in the sustainable financial sector of the future.