With the rise of environmental issues, financial solutions and products incorporating societal and environmental dimensions have multiplied: solidarity savings, SRI funds, green bonds…
First and foremost, institutional investors (in the sense of asset holders) with long-term investment horizons have been pioneers in considering climate and ESG risks in their asset allocation strategy, as these risks can influence their returns and expose them to specific risks.
For asset management companies, the challenge consists in offering solutions to meet the needs of their clients, the end investors. They manage funds or mandates and provide original expertise for implementing thematic investments or a comprehensive consideration of climate issues tailored to an asset class, therefore becoming a differentiating factor. However, the success of this approach holds the risk of greenwashing on one hand and questioning the relevance of investment choices on the other.
French and European public authorities support this development. Regulations require portfolio management companies to publish figures on their ESG policy and the orientations of funds (UCITS and AIF) offered to the public.
Private banks and French asset management companies are specifically impacted by:
- European Taxonomy:
Publication of the final version of sustainability criteria for climate objectives 1 and 2: This publication, effective since January 1, 2023, specifies economic activities considered as substantially contributing to climate change mitigation. It acts on private banks and asset management companies in their duty to advise and classify financial products.
- SFDR:
Level 2 of the regulation that came into effect on January 1, 2023: This level specifies reporting and transparency requirements for financial products incorporating ESG criteria. Actors must now provide more detailed information on their sustainable investment strategies and the impact of their portfolios on environmental and social aspects.
- DPEF:
Adoption of the draft law on the duty of vigilance of companies aimed at holding French companies accountable throughout their value chain for respecting human rights and the environment. Private banks and asset management companies will have to integrate these requirements into their investment and fund selection processes.
- Future of ESG Regulation:
Towards harmonized ESG reporting: The European Commission has presented directives aiming to create standardized ESG reporting for companies, improving data comparability and facilitating sustainable investment.
The Commission, the Council, and the European Parliament have recently adopted a regulation focusing on restoring trust in ESG ratings. This initiative marks a crucial turning point for the banking sector, highlighting the need for a thorough assessment of ESG risks in the supply chain, especially through the Purchasing function, and a requirement for enhanced transparency from extra-financial rating agencies (methodologies, data sources). The European Securities and Markets Authority (ESMA) will play a regulatory role, granting approval, monitoring, and imposing sanctions in case of non-compliance with ESG standards.
- Sustainable Financial Investments:
- Growth of the ESG fund market: Demand for sustainable financial products continues to increase, prompting private banks and asset management companies to develop new offerings that meet these expectations.
- In addition to these developments, it is crucial to follow international initiatives in ESG regulation, such as the work of the Task Force on Climate-related Financial Disclosures (TCFD) and the International Sustainability Standards Board (ISSB).
Spotlight on Capital Banking Solutions: Key Partner for Financial Sustainability
ESG regulation is constantly evolving, and even though French private banks and asset management companies are not subject to as strict a framework as asset holders, they must adapt, stay informed, and become familiar with the various applicable texts to ensure effective risk management and meet client expectations.
The integration of responsible investments into management strategies is carried out through three approaches:
- A value or ethical-oriented approach, favoring an exclusion strategy (refusing to invest in morally reprehensible sectors).
- An approach seeking to capture the possible outperformance of “virtuous” companies by relying on best-in-class selections (in each sector, companies with the best ESG ratings), or best effort (in companies that have most improved their rating over time), or best in Universe (strategies with the highest ESG ratings, regardless of the sector), or even worst-in-class
- A third and final approach that will prioritize the investment’s impact, either with a combined optimization logic (at equal optimized financial performance, choose the investment with the most ESG impact), or with a thematic logic (subordinating financial returns to investments in certain types of projects and companies).
ESG Management is experiencing rapid growth with significant flows towards this type of strategy and an increase in assets under management. However, it poses some challenges and limitations that need to be addressed. ESG information can reveal poorly assessed risk factors (mispricing) based on financial information alone, and the unique and overall assessment of the E, S, and G dimensions may drown out relevant information in order to capture material non-financial risk.
Tactical management requires having suitable tools that allow the integration of ESG data into all business processes (pre-trade and post-trade), with enough flexibility and granularity.
It is understood that with:
- A regulatory framework that keeps on expanding
- The multiplicity of tactical investment approaches
- The growth of flows and assets responding to an ever-increasing number of green products on the market
- The drifts of Greenwashing and mispricing that will be increasingly penalized
Management requirements have become increasingly stringent, and the need to adopt more sophisticated tools has become critical.
Capital Banking Solutions, as a software publisher and integrator of banking solutions, puts itself as a key partner for banks and asset management companies seeking to navigate seriously within the framework of responsible finance (SRI, ESG, …).
By offering innovative banking and financial solutions, Capital Banking Solutions provides financial institutions with the tactical tools necessary to steer their ESG strategies, leverage ESG data across all business processes, integrate customer preferences, simulate the performance and risks of their investments based on financial and non-financial criteria; analyze portfolios according to relevant indicators, comply with current regulations, and report to their clients.
Sustainable Finance by Capital Banking Solution
Integration of ESG Data into Business Processes:
- Flexible data model: Allows the integration of ESG data from various data providers (single or multi-source).
- ESG indicators at the portfolio level: Overall ESG score, scores for each E, S, and G dimension, indicators related to PAI (Extra-Financial Analysis), alignment rates with taxonomy, SFDR classification, etc.
- Pre-trade controls: Consider client sustainability preferences.
- Investment simulation: Includes both financial and non-financial criteria.
- Client Reporting
To learn more:
- Recommended reading to delve into these topics:
- “La Finance verte,” Jean Boissinot (Dunod)
- “Investing in the era of climate Change,” Bruce Usher (Columbia Business School Publishing)
About Capital Banking Solutions:
For over 25 years, Capital Banking Solutions has been publishing and integrating innovative banking solutions tailored to international banks of all types. With our expertise, years of experience, and continuous research and development, we create and offer a wide range of innovative products to meet the needs and challenges of the banking market and our 200 client banks and financial institutions.
As a reference in universal banks, retail banks, corporate banks, private banks, Islamic banks, treasury banks, as well as in microfinance, neo-banks, family offices, and asset management and intermediation companies, we provide open-architecture, modular software available on the cloud or on-premise.
Capital Banking Solutions leverages its 300 expert collaborators based in France, Monaco, Switzerland, Lebanon, Ivory Coast, Dubai, and the USA to ensure perfect monitoring of our products, services, and maintain close relationships with all our clients.
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