ESG explained

ESG is an umbrella term for the sustainability concept. The areas of Environment, Social and Governance form a framework in which a company’s operations are grouped and evaluated from a business perspective: Does the company follow the goal to make use of a regenerative system in such a way that it can be preserved in the long term? And can its existing structure be naturally renewed?

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Sustainable Development Goals (SDG's)

1. End poverty

2. End hunger

3. Good health and well-being

4. Quality education

5. Gender equality

6. Clean water and sanitation

7. Clean energy

8. Decent work and economic growth

9. Industry, innovation, and infrastructure

10. Reducing inequality

11. Sustainable cities and communities

12. Responsible consumption

13. Climate action

14. Life below water

15. Life on land

16. Peace, justice and strong institutions

17. Partnerships for the goals

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ESG Key Performance Indicators

The three dimensions

Sustainability will be the basis in the future, tackling every element in a company, bank or institution. Performance in the field of sustainability is measurable and comparable. The time is now to face the challenge, sharpen the brand, and create sustainability strategies.

Environmental Impact

… is defined as changes to the environment resulting from a business’ operations, products or services.

  • How do you ensure climate change mitigation? Do you reduce carbon emissions?
  • How efficiently do you use the natural capital such as water, land, and raw materials. Do you protect biodiversity?
  • How do you keep pollution and waste to a minimum? Do you ensure circularity of your products?
  • How do you have a positive impact? Do you support clean tech, green buildings, and renewable energies?

Social
Impact

… of a business are the effects on its employees and communities it engages in.

  • How well do you work with and manage your human capital? Do you ensure health and safety, employee development, fair working conditions?
  • What do you do to be trusted? Do you adhere to quality and safety standards, ensure privacy and data security, and raise awareness on social protection and inclusion?
  • How do you ensure a positive social impact? Do you utilise events, platforms, knowledge sharing, and support for local communities?

Governance Impact

… comprises the effects of a business’ behavior onto organized society

  • How do you ensure adherence to laws, regulations, and policies? Do you have processes, procedures, and standards in place?
  • How advanced is your corporate governance? Do you have a corporate conduct for members of the board, employees, and stakeholders?
  • What does your corporate behavior look like? Do you ensure good business ethics, anti-competitive practices, anti-corruption, and tax transparency?
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ESRS Indicators

Source: EFRAG European Sustainability Reporting Standards

Descriptions

  • Provide services to access data insights
  • Enable faster data driven decision making
  • Ensure data quality
  • Manage internal and external data sources

Questions

  • How to build AI models?
  • What data analytics tools are available?
  • How to manage the data quality?
  • How to access external data sources?
  • Where to host the data and the analytics?
  • How do I create operationalise a data science service?

Climate change

  • Transition plan for climate change mitigation
  • Measurable targets for climate change mitigation and adaptation
  • Energy consumption and mix
  • Scope 1,2, and 3 GHG Emissions
  • GHG intensity per net turnover
  • Potential financial effects from material physical risks

Pollution

  • Measurable targets for pollution
  • Pollution of air, water and soil
  • Substances of concern and most harmful substances
  • Pollution-related incidents and deposit impacts and risks, and financial exposure to the undertaking

Water and Marine Resources

  • Measurable targets for water and marine resources
  • Water management performance
  • Water intensity performance
  • Marine resources-related performance

Biodiversity and Ecosystems

  • Transition plan in line with the targets of no net loss by 2030, net gain from 2030 and full recovery by 2050
  • Metrics on, for example, land use change, deforestation, etc.
  • Biodiversity-friendly consumption and production metrics

Resource Use and Circular Economy

  • Resource use and circular economy action plans
  • Resource inflows
  • Resource outflows
  • Waste
  • Resource use optimisation
  • Circularity support

Own Workforce

  • Characteristics of the Undertaking’s Employees
  • Training and Skills Development indicators
  • Fair remuneration
  • Pay gap between women and men
  • Employment of persons with disabilities

Workers in the Value Chain

  • Policies related to value chain workers
  • Channels for value chain workers to raise concerns
  • Targets related to managing material negative impacts, advancing positive impacts, and managing material risks and opportunities

Affected Communities

  • Processes for engaging with affected communities about impacts
  • Channels for affected communities to raise concerns
  • Targets related to managing material negative impacts, advancing positive impacts, and managing material risks and opportunities

Consumers and End-Users

  • Processes for engaging with consumers and end-users about impacts
  • Channels for consumers and end-users to raise concerns
  • Targets related to managing material negative impacts, advancing positive impacts, and managing material risks and opportunities

Governance, risk management and internal control

  • Governance structure and composition
  • Corporate governance code or policy
  • Diversity policy
  • Remuneration policy
  • Risk management processes
  • Internal control processes
  • Composition of the administrative, management and supervisory bodies

Business Conduct

  • Business conduct culture
  • Policies and targets on business conduct
  • Prevention and detection of corruption and bribery
  • Anti-competitive behaviour prevention and detection
  • Corruption or bribery events
  • Political engagement and lobbying activities
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Steps to receive a rating

Source: MSCI ESG ratings

1.

Assessment of the performance for each individual criterion (e.g. on a scale from one to five)

CCC and B

Laggard

A company lagging its industry based on its high exposure and failure to manage significant ESG risks

2.

Weighting of the individual criteria according to their relevance for the overall rating (Industry specific)

BB, BBB and A

Average

A company with a mixed or unexceptional track record of managing the most significant ESG risks and opportunities relative to industry peers

3.

Aggregation of the individual criteria into an overall rating

AA and AAA

Leader

A company leading its industry in managing the most significant ESG risks and opportunities

Link

Sustainable Finance

Why the financial sector?

We can

  • re-orient investments towards more sustainable technologies and businesses
  • finance growth in a sustainable manner over the long-term
  • contribute to the creation of a low-carbon, climate resilient and circular economy

Action areas

  • Reorienting capital flows towards a more sustainable economy
  • Mainstreaming sustainability into risk management
  • Fostering transparency and long-termism

Source: European Comission - sustainable finance

Descriptions

  • Provide services to access data insights
  • Enable faster data driven decision making
  • Ensure data quality
  • Manage internal and external data sources

Questions

  • How to build AI models?
  • What data analytics tools are available?
  • How to manage the data quality?
  • How to access external data sources?
  • Where to host the data and the analytics?
  • How do I create operationalise a data science service?

Climate change

  • Carbon emissions
  • Product Carbon Footprint
  • Financing Environmental Impact
  • Climate Change Vulnerability

Natural capital

  • Water stress
  • Biodiversity & Land Use
  • Raw Material Structuring

Descriptions

  • Toxic Emissions & Waste
  • Packaging Material & Waste
  • Electronic Waste

Environment Opportunities

  • Opportunities in Clean Tech, Green Building & Renewable Energy

Human Capital

  • Labor Management
  • Health & Safety
  • Human Capital Development
  • Supply Chain Labor Standards

Product Liability

  • Product Safety & Quality
  • Chemical Safety
  • Privacy & Data Security
  • Responsible Investment
  • Insuring Health & Demographic Risk

Stakeholder Opposition & Social Opportunities

Corporate Governance

  • Board
  • Pay
  • Ownership
  • Accounting

Corporate Behavior

  • Business Ethics
  • Anti-Competitive Practices
  • Corruption & Instability
  • Financial System Instability
  • Tax Transparency
Link

Glossary

ESG Glossary

EU Taxonomy

"A UNIFIED EU GREEN CLASSIFICATION SYSTEM „ The EU taxonomy is a classification system, establishing a list of environmentally sustainable economic activities." "[…] The EU taxonomy would provide companies, investors and policymakers with appropriate definitions for which economic activities can be considered environmentally sustainable."

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Sustainable finance

Makes sustainability considerations part of financial decision-making. This means more climate neutral, energy- and resource-efficient and circular projects. Sustainable finance is needed to implement the Commission’s strategy towards achieving the SDGs.

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Green deal

The European green deals is a concept developed by the EU Commission with the aim of creating a transition to a modern a modern, resource-efficient and competitive economy, ensuring:

  • no net emissions of greenhouse gases by 2050
  • economic growth decoupled from resource use
  • no person and no place left behind

The Green Deal is thus a central building block of the EU's climate policy and includes various measures, for example in the area of financial market regulation (sustainable finance) or energy supply.

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Green Bond (EUGBS)

"The European green bond standard (EUGBS) is a voluntary standard to help scale up and raise the environmental ambitions of the green bond market. Establishing this standard was an action in the Commission’s 2018 action plan on financing sustainable growth and is part of the European green deal." " […] the regulation will set a gold standard for how companies and public authorities can use green bonds to raise funds on capital markets to finance […] large-scale investments, while meeting sustainability requirements and protecting investors."

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Impact investing

"Impact investing is an investment strategy that aims to generate specific beneficial social or environmental effects in addition to financial gains. Impact investments may take the form of numerous asset classes and may result in many specific outcomes. The point of impact investing is to use money and investment capital for positive social results."

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Sustainable Finance Disclosure Regulation (SFDR)

Sustainable Finance Disclosure Regulation (SFDR) (Offenlegunsverordnung): The EU Disclosure Regulation (Regulation (EU) 2019/2088) is a building block to steer financial flows towards low-carbon and more climate resilient development by increasing transparency and harmonising disclosure requirements in the financial services sector. With the new law, also called Sustainable Finance Disclosure Regulation or SFDR, the EU wants to combat greenwashing in the financial and banking sector even more effectively.

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Task Force on Climate-related Financial Disclosures (TCFD)

Task Force on Climate-related Financial Disclosures (TCFD): "The Financial Stability Board established the Task Force on Climate-related Financial Disclosures (TCFD) to develop recommendations for more effective climate-related disclosures that could promote more informed investment, credit, and insurance underwriting decisions and, in turn, enable stakeholders to understand better the concentrations of carbon-related assets in the financial sector and the financial system’s exposures to climate-related risks."

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TCFD recommendations

The TCFD recommendations are a framework developed by the Task Force on Climate-related Financial Disclosures (TCFD) "to help public companies and other organizations more effectively disclose climate-related risks and opportunities through their existing reporting processes."

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Corporate Sustainability Reporting Directive (CSRD)

Large companies have to publish information related to:

  • environmental matters
  • social matters and treatment of employees
  • respect for human rights
  • anti-corruption and bribery
  • diversity on company boards (in terms of age, gender, educational and professional background)

The standards will be tailored to EU policies, while building on and contributing to international standardisation initiatives. The first set of standards would be adopted by October 2022.

Read more

    AIFM = Alternative Investment Fund Manager
    CIS = Commonwealth of Independent States
    CRS = Corporate Social Responsibility
    EBF = European Banking Federation
    EBRD = European Bank for Reconstruction and Development
    ECBC = European Covered Bond Council
    EES = European Economic Area
    EMF = European Mortgage Federation
    ESG = Environmental, Social and Governance
    ESG = Environmental, Social and Governance
    ESIA = Environmentalm and Social Impact Assessment
    EU = European UnionFAO = Food and Agriculture Organization
    EUGBS = European Green Bond Standards
    FDI = Foreign Direct Investment
    FSI = Financial Soundness Indicator
    GDP = Gross Domestic Product
    GHG = Greenhouse Gas
    GLAAS = Global Analysis and Assessment of Sanitation
    IAEA = International Atomic Energy Agency
    ICT = Information and Communication Technologies
    IEA = International Energy Agency
    IFC = International Finance Corporation
    ILO = International Labour Organization
    KPI = Key Performance Indicator
    MDG= Millennium Development Goal
    MDGs = MillenniumDevelopment Goals
    MGI = McKinsey Global Institute
    MPA = Marine Protected Area
    NDC = Nationally
    Determined Contributions
    NEET = Not in Education, Employment or Training
    NGO = Non-Governmental Organization
    NPL = National Poverty Line
    OECD = Organisation for Economic Cooperation and Development
    PES = Payment for Ecosystem Services
    PPI = Payment Protection Insurance
    PPP = Public Private Partnership
    R&D = Research and Development
    RI = Responsible investment
    SCRD= Sustainable Corporate Bond ETF
    SDG = Sustainable Development Goal
    SDGs = Sustainable Development Goals
    SFDR= Sustainable Finance Disclosure Regulation
    SME = Small and Medium Enterprise
    SRI = Socially Responsible Investing / Sustainable Responsible Impact Investing
    SROI = Social Return on Investment
    TCFD = Task Force on Climate-related Financial Disclosures
    TEEB = The Economics of Ecosystems and Biodiversity
    UDHR = Universal Declaration of Human Rights
    UN = United Nations
    UN PRI = United Nations Principles for Responsible Investment
    UNDP = United Nations Development Programme
    UNESCO = United Nations Educational, Scientific and Cultural Organization
    UNICEF = United Nations International Children’s Emergency Fund
    VNR = Voluntary National Review
    WHO = World Health Organization

      • 55% - More storage than required. On premise and cloud services.
      • 90% - More floorspace than required for storage environment
      • 400% - More power than required for storage environment
      • 120% - More capacity than required for efficient back-ups
      • 450% - Overspend on disparate back-up appliances and software licences
      Link

      Find out more

      Recent articles and podcasts, upcoming events and newsletters

      Articles and blogs

      • How to break this assignment down to
        manageable steps?
      • How to add value to Volvo at every step?
      • How would Volvo make the business
        prioritize their efforts and offer support?
      • What part of the application is being used the most (that 20% of code being used for 80% of the time)?

      Podcasts

        Finance for Future_Minful Finance Institute (Spotify)
        The Sustainalytics Podcast (by Sustainalytics – A Morningstar Company) (Spotify-Link)
        Ausgeprochen nachhaltig (Kfw Bankgruppe) (Spotify)
        ESG Insider (by S&P Global)
        ESG Now Podcast (weekly; by MSCI)
        Refinitiv Sustainability Perspectives (by Refinitiv, by-monthly)
        The ESG Experience (by Goby) (US Software Anbieter)
        ESG Soundbite Series (by Linklaters) (Spotify)

        • How to break this assignment down to
          manageable steps?
        • How to add value to Ablera at every step?
        • How would Ablera make the business
          prioritize their efforts and offer support?
        • What part of the application is being used the most (that 20% of code being used for 80% of the time)?

        Der Philosoph: Geld und Ethik (Teil 1, Spotify) & Der Philosoph: Ethik und Finanzwirtschaft (Teil 2, Spotify) (von Finance for Future)
        Nachhaltige Banken (von Zukunft Jetzt - Klima-Impulse für den Alltag) (Spotify)
        Bankgeheimnis: Nachhaltigkeit in der Unternehmensfinanzierung (Spotify)
        The EU Green Bond Standard: what is it? (Linklaters Podcast) (Spotify)

        Video

        Read-out/press conference on on the New Sustainable Finance Strategy and a European Green Bond Standard

        „The Future of Real Estate“ Im Dialog mit Claus Thomas, Vorsitzender der Geschäftsführung BNP Paribas REIM


          Link

          Let's talk!

            Marinela Bilic-Nosic

            Executive Partner Banking

            Regulatory, Risk, Compliance Lead DACH

            marinela.bilic-nosic@ibm.com
            +49 173 7206070

                  Christina Rohschürmann

                  Senior Managing Consultant

                  Banking & Financial Markets

                  christina.rohschuermann@de.ibm.com
                  +49 172 2665833