Furthermore, participants at the two-day event in Amsterdam – of which NatWest was a lead sponsor – agreed on the need for private sector initiatives to help establish globally compatible sustainability reporting standards, alongside regulatory frameworks.

The conference brought together delegates from across the banking industry, capital markets, regulators and policy makers. Areas discussed included the outlook for reporting and data, regulation, sustainable finance markets, engagement strategies and transition.

1. The critical role of data – but don’t let the perfect get in the way of progress: with data for social projects ‘historically’ more difficult to gather over time, and with ‘green’ data not only having to cover climate/net zero projects but also wider environmental initiatives (such as for example waste management, circular economy, biodiversity) collating accurate, verifiable data remains a challenge – in particular, when it comes to climate stress testing or scenario analysis. However, the perfect shouldn’t get in the way of progress: the direction of travel – or finally starting data collection if it hasn’t happened yet - is more important than absolute precision of the data; these can be fine-tuned over time. Yet, greenwashing remains a significant concern despite improving data granularity, especially when moving from company to ESG fund reporting. Regulations and (retail) investor scrutiny are key to ensuring that sustainable projects deliver what they say on the package. 

2. Own your ESG progress reporting, don’t just wait for regulators to tell you what to do: the private sector needs to be proactive and work together on ensuring that comparable ESG data/reporting is available to increase transparency for all market participants and make it easier to rank ESG performance of companies and organisations. At the same time, issuers must strive to deliver full evidence of their ESG delivery, regardless of regulations (such as the EU taxonomy).

3. Global compatibility of ESG reporting standards with sector or country specifics are the ultimate goal: the sustainability reporting landscape has constantly evolved with new and competing reporting frameworks and benchmarks striving for dominance. The resulting “alphabet soup” of standards and frameworks has created some confusion among publishers and users of reports as each standard can have different objectives and focus areas. The good news is that efforts are underway to help achieve greater coherence, consistency and comparability between those reporting frameworks. For example, the International Sustainability Standards Board (ISSB) is planning to consolidate the content from the TCFD, CDSB, SASB, Integrated Reporting, and the WEF IBC’s stakeholder capitalism metrics into a coherent framework. Despite these efforts, market participants remain cautious: global alignment on ESG reporting can only partially be achieved within the next years.

4. The unintended side effects of regulation: while there is general consensus that additional ESG regulation is required, market participants are recognising that there can be unintended side effects - for example, the Sustainable Finance Disclosure Regulation (SFDR) could become a labelling exercise rather than help to genuinely foster sustainable investing , or the EU taxonomy being seen as a necessary criteria for getting investments, albeit a number of sectors (e.g. healthcare) are not (yet) being covered by the EU regulation. Yet, participants agree that EU regulations provide useful guiding principles for investors and institutions; and other jurisdictions are learning from the EU – and the issues they are facing.  

5. Channeling benefits of regulatory framework into the real word is key: the benefits for Taxonomy-aligned products and services should be leveraged to unlock further investments toward the transition to a more sustainable economy. Indeed, the Retail ESG offering has been growing over the past few years; however, institutions need to play a bigger part in proactively educating retail customers about these new products.
 

6. Banking capital rules and climate risks: rules around concentration limits for exposures with heightened climate (transition & physical) risks are now being considered. With approximately 10% of banks globally currently holding 60-70% of the emissions, central banks are targeting their efforts at a handful of banks with regard to methodologies and possibly capital buffers in the future. 

7. Markets are becoming more sophisticated: the scrutiny of investors and other stakeholders of transition plans is intensifying – the commitment to achieve net zero by 2050 isn’t sufficient any longer. Issuers also need to set interim milestones (between now and 2050) and develop credible, measurable, time-bound and actionable transition plans. Furthermore, institutions are increasingly expected to incorporate their assessment of physical and transition risks into their risk management framework.

8. Growth in the Green Social and Sustainability (GSS) bond market and innovation in securitisation to unlock new capital for social and environmental activities: while GSS bond market volumes have been slightly disappointing at the start of the year, participants expected the rapid GSS bond growth will continue as the key structural drivers remain intact. In this context, the slowdown in GSS issuance in 2020 (due to the COVID-19 pandemic), followed by a surge in 2021, can be seen as a good parallel for 2022 and beyond. Meanwhile, Green securitisation - still in its infancy - is expected to boost and help to further develop the market; especially if governments lend their support via lower capital charges for investors. In turn, this would allow financial institutions to securitise a larger pool of green loans, freeing up capital in the process which could then be used for new green loans financing.
 

9. Blended Finance can play essential role in unlocking commercial finance towards sustainable development in developing countries:  Since last year’s OECD paper about blended finance, its role in achieving global sustainability has definitely been recognised, however, the scale of blended finance needs to increase significantly over the next years to ensure no one is left behind.  Some innovative financing structures are already being discussed (involving securitisation and venture capital structures) in addition to more traditional instruments (such as guarantees) – in particular to boost SME financing in emerging markets.

10. Active engagement will create significant business opportunities as corporates and institutions transition to a more sustainable economy:  ambitious stewardship, including further products and services innovations, are needed to deliver against beneficiaries’ interests and improve the sustainability and resilience of the financial system. Green bonds can be particularly helpful to support this trend as investors tend to be more actively engaging with Green bond issuers. 

11. Delivering impact is more than fulfilling a set of ESG targets: while focusing on their ESG targets, companies and organisations must not lose sight of questioning the true impact of each of their measures. Therefore, setting and clearly outlining impact targets at company level is as important as setting ESG targets. Thinking about impact goes back to taking responsibility for proactively fostering sustainability (creating positive environmental and social impact) rather than just ticking boxes dictated by regulators.

12. Green and Social Transition need to go hand-in-hand: companies and organisations need to be able to show how they make sure that their strategies tackle climate change avoid or minimise negative impact. If net zero strategies result in any negative social impact, then the costs of the impact should be distributed or absorbed on a fair basis. 

The conclusion from the conference: Sustainable finance and sustainability reporting have both seen rapid progress already, but more work lies ahead - underpinned by a positive sentiment: ESG opportunities far outweigh the challenges and efforts to get there.

NatWest at the AFME Sustainable Finance Conference

If you want to hear more about any of the topics raised at the AFME conference, please reach out to one of our specialists:
 

• 📧 Caroline Haas, Managing Director, Head of Climate & ESG Capital Markets
• 📧 Dr. Arthur Krebbers, Head of Corporate Climate & ESG Capital Markets
• 📧Tonia Plakhotniuk, Vice President, Climate & ESG Capital Markets
• 📧 Dan Bressler, Vice President, Corporate Climate & ESG Capital Market