Sustainable finance

The EU Action Plan on Sustainable Finance is leading to several new EU regulations and amendments of existing regulatory texts applicable to financial service providers. These new regulations will have far-reaching consequences for the entire value chain of banks, insurance companies and asset managers, and will require significant implementation efforts. New requirements are being added to existing legislation, such as the Non-Financial Reporting Directive.

What are your objectives?

• Understand EU and national regulatory requirements and their implications for products, services, processes and business segments
  

• Identify concrete actions necessary for compliance

• Design a target operating model for processes and IT to integrate the new requirements

• Define implementation timelines and milestones

• Implement solutions

PwC can help you assess the regulatory landscape and perform an impact assessment, followed by a gap analysis. Our specialists will work closely with you to review policies and develop a new target operating model and roadmap. We will help to determine where your organisation stands and build a tailored sustainability plan depending on where you want to go.

Sustainable finance offers very attractive opportunities for business development, competitive advantages and profitability, and thus should be an integral part of your corporate strategy. Identifying the best possible options for strategic positioning in the market, as well as for sustainable product and service portfolios, will be essential to your future success.

What are your objectives?

• Understand the demands of existing (and potential future) customers

• Analyse the positioning of key competitors and identify best practices

• Identify opportunities to deliver added value to clients

• Identify the potential for development of new products, services or business models

• Identify opportunities and risks in the market, be positioned optimally and pursue the right strategy to enable profitability and competitiveness in the long run 

PwC can help you perform a market analysis on requirements of existing and potential clients with respect to your lines of products and services, a competitive analysis on the strategies and positioning of key competitors, a readiness assessment, and define the different options for your strategic positioning.

For financial institutions, integrating sustainability means revising some aspects of your current governance model and risk appetite framework, as all considerations stemming from sustainable finance have an impact on virtually all layers of your organisation and its relationship with all its stakeholders, from investors to customers. 

What are your objectives? 

• Review organisational structure from a climate and environmental perspective to be aligned with market and supervisory expectations 

• Embed ESG elements into the institution’s mission, vision and core values in order to promote conscious behaviours and decisions

• Upskill of relevant staff and senior management on sustainability

• Embed climate-related analysis into core capabilities, such as: portfolio decisions, development or refinement of products and services, pricing and underwriting, overall risk management and business continuity management

• Review existing partnerships and assess new strategic partnerships (e.g. industry groups such as TCFD, NGO, public sector)

• Define tailored communication and disclosure channels, including escalation process for unexpected ESG issues

• Revisit own reporting frameworks to include ESG-related KPIs 

Starting with an assessment of the current maturity of your climate governance, PwC can help you adjust your organisational structure to incorporate climate and environmental considerations, assess your data governance framework as part of your reporting framework that has to be fully integrated with climate and environmental considerations, conduct cost benefit analysis with relevant stakeholders to evaluate current and potential partnerships, raise awareness of the governing bodies and their risk management responsibilities, promote an environmental, social and governance (ESG)-conscious culture company-wide.

Financial institutions will need to integrate climate-related and environmental risks within their overall business model and strategy, which implies re-assessing their risk appetite, governance, risk management and disclosure functions to take into account these new risks across their entire business. 

At an early stage, the scarcity of climate-related data and its complex relationships with the traditional risk drivers can represent a challenge for the institutions that might need support from quantitative analysts and climate-related and environmental experts. New KPIs and key risk indicators (KRIs), such as climate Value-at-Risk (VaR) and adjusted probability of default (PD) should be embedded in internal reporting frameworks to allow senior management to take the right courses of action. 

What it means for banks?

The European Central Bank (ECB) will require progress reports on the integration of such risks, based on upcoming guidelines. Specifically, these reports will have to show how financial institutions are living up to the ECB’s expectations on climate-related and environmental risks by integrating them at all stages of their risk management framework with, among other factors, sufficient involvement of the management board. 

The ECB and the European Banking Authority (EBA) are invested in pushing financial institutions to actively manage climate-related and environmental risks with scenario analysis and stress tests at the centre of the discussion.

What it means for insurance companies?

Considering that, to a certain extent, current underwriting and pricing strategies might already take into account the expected impact of climate change, and that the guidelines issued by the European Insurance and Occupational Pensions Authority (EIOPA) on Own Risk and Solvency Assessment (ORSA) require undertakings to have a forward looking assessment of solvency needs (also reflecting undertaking’s risk profile), it seems however relatively clear that the ORSA’s will have to further assess climate change risks using scenario analysis, with a longer-term perspective when performing the related quantitative analysis. While several consultations are still open, EIOPA expects undertakings to integrate climate change risks in their system of governance, risk-management system and ORSA, in line with Solvency II legislation, guidelines and the Opinion on Sustainability within Solvency II.

What are your objectives? 

• Understand where your institution stands compared to best practices for climate-related and environmental risk management and their potential impacts on your business model and strategy

• Embed climate-related and environmental criteria in the risk management framework (operational, credit, liquidity, and market risk) 

• Manage portfolios’ exposure to climate-related and environmental risks

• Perform climate change scenario analysis and stress testing

• Develop the appropriate KPIs and KRIs 

• Assess the impact on climate-related and environmental risks on your capital adequacy 

PwC can help you perform an initial gap analysis across the principles articulated by the ECB and best market practices, define a target state and road map for implementation (taking into account the institution’s strategy and expected changes to the business and operating environment), identify material climate and environmental risks for your business model and strategy, support the risk management function in their integration process of climate-related and environmental risks into the risk management framework of your organisation (including modelling and stress testing).

More about climate-related and environmental risks

PwC’s Climate Excellence tool

Our Climate Excellence tool will prove valuable in helping you calculate the consequences of specific climate transition risks such as changing prices, demand, technological advances or regulatory intervention. The tool allows you to holistically analyse the financial portfolios of up to 40,000 listed securities for climate risks. 

More about PwC’s Climate Excellence tool

Very shortly, financial institutions will be progressively required to disclose information on their actions in terms of sustainable finance. While a few disclosure requirements were already applicable for some companies under the Non-Financial Reporting Directive (information included in the annual reports on the way they operate and manage social and environmental challenges), the EU Taxonomy Regulation (2020/852) defines the criteria to be considered by companies (including all financial market participants) when disclosing their sustainable business activities. Additionally, the Regulation on sustainability-related disclosures in the financial services sector (2019/2088) adds a layer to the required disclosures for the financial market participants. It’s essential to start preparing now to meet the demand for transparency and accountability from regulators, shareholders, customers and society at large.

What are your objectives? 

• Understand which products fall within the scope of the requirements 

• Match the disclosure requirements with available data 

• Prepare the data to be disclosed as per applicable regulatory requirements

• Disclose ESG related risks 

• Reinforce your sustainable finance positioning within the industry by implementing voluntary disclosure 

• Effectively communicate your ESG-related achievements to the public

• Leverage existing reporting frameworks to allow for more transparency and comparability  

PwC can help you create a data requirements flow, map the investments behind your financial products according to the EU Taxonomy criteria, prepare the required financial disclosures (environmentally sustainable turnover and expenditure), identify the impacts of the various disclosure requirements on your organisation, build a roadmap that integrates your priority actions with respect to pre-contractual and organisational disclosure information. We can also help you perform an analysis and evaluation of voluntary sustainable finance initiatives (e.g. United Nations Principles for Responsible Investment, UN Global Compact, etc.) by developing decision trees that will allow you to assess the impact on your products, design and implement CSR/Non-Financial Reporting (e.g. TCFiD, GRI).