The transition to sustainable finance is one of the greatest challenges facing the financial sector. That is why the discussion about how we can base our investment criteria on the three goals of environment, social affairs and good corporate governance (Environment, Social, Governance, ESG) is of crucial importance for the entire industry.
The latest coverage of the wealth manager DWS signals that the public is becoming more and more interested in how companies disclose information on sustainable financial investments. DWS has made it clear that it stands by its statements and firmly rejects the allegations of a former employee that DWS operates with its sustainable investment products “Greenwashing”.
The example shows, however, that the financial sector is at the center of a development – and that is a good thing. Much is currently in motion, standards are evolving, science is making progress. Supervisory authorities, banks, asset managers and investors deepen their specialist knowledge every day. The same goes for our customers.
But as important as the work still to be done on sustainability standards is, banks can and must act now so that their ESG ambitions can have a tangible impact as quickly as possible. So how can we give sustainability the priority it needs in our investment criteria? And how can sustainability be organized and measured in such a way that we actually make progress?
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Make sustainability a top priority
The answer: We have to develop a set of instruments with which we can steer our work in the area of ESG. With the right approach, banks can make real progress on the path to greater sustainability and prepare for the more demanding regulatory framework that is rightly expected. Deutsche Bank’s experience suggests seven rules for the financial sector:
Firstly, it is important to back up your own sustainability goals through good corporate governance – and to make them a top priority. This is where the decisions have to be made as to how a company’s sustainability strategy is actually implemented. And the implementation of these decisions in the operational business must be consistently followed up. The CEO Christian Sewing heads the sustainability committee of Deutsche Bank. This is where the most important decisions are made every month on how we actually implement our sustainability strategy.
Second, the sustainability goals must be linked to the remuneration – in a transparent way. This also starts at the top of the company, for example by linking the remuneration of top managers to the fact that ESG criteria are met. The criteria and goals must be based on credible and verifiable key figures – for example on the ratings of the leading sustainability rating agencies. And the effect on remuneration must be noticeable enough to be taken seriously.
Third, we have to think long-term, but act in the short term. Short-term goals help to drive the necessary organizational change, to be one of the pioneers in product development and to quickly correct the course if necessary.
Because even if longer-term thinking is essential in the markets for sustainable investments in order to keep an eye on “net zero” and other goals of the European Union and national governments: Intermediate goals over a period of three to five years are essential when it comes to change Accelerate within the organization and anticipate regulatory changes.
To hold individuals accountable
Fourth, set goals that are detailed enough to hold individuals accountable for. This means breaking down a company’s overarching sustainability goals into business areas and fields, customer segments and categories (environmental, social or governance) – so that every team and every manager knows what their responsibility is. In this way, companies can integrate ESG management into general corporate management and quarterly reporting. The message is clear: sustainability is now part of everyday business life.
Fifth, be selective. The goals must also be transparent with regard to which transactions are considered sustainable and which are not. Robust internal checks and balances are vital when it comes to building green credibility in the financial sector. The control functions that monitor whether goals are being achieved must be tough: it must be possible to exclude transactions if they do not meet ESG criteria.
To do this, these functions need the necessary independence from the business areas. Decisions about which businesses are classified as ESG compliant and which are not must be based on a combination of in-house expertise and external expert opinions and insights. It is important that strong governance controls whether a transaction meets defined ESG standards.
Practice what you ask of others
Sixth, practice for yourself what you ask others to do. The promise of sustainable action not only includes doing business with customers, but also all aspects of our own operations. This includes decisions about how much of the energy a company consumes should come from sustainable sources, as well as questions about the regulations for travel or company cars or the energy efficiency of office buildings.
And finally, seventh, the most important thing: We have to align our sustainability goals with recognized frameworks. Deutsche Bank now measures the impact of its ESG activities against the United Nations Sustainable Development Goals and the Paris Climate Agreement. This brings its own challenges – because the direct effects of some measures and transactions are sometimes still difficult to measure. Verifiable external reference points are therefore essential. They are the prerequisite for our ambitions to have an impact.
We still have a lot of work to do. We banks have to work together, for example within the framework of the “Partnership for Carbon Accounting Financials” and other industry initiatives. Our top priority is clear: we need to work with regulators and everyone who sets standards and political decisions to create a unified, transparent, global framework for measuring and monitoring the transition to a more sustainable financial system.
At the same time, banks can and should systematically manage their ESG progress now. There was seldom more at stake for our industry than it is today.
The authors: James von Moltke is CFO of Deutsche Bank. Gerald Podobnik is CFO Corporate Bank of Deutsche Bank and a member of the Federal Government’s Sustainable Finance Advisory Board.
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