17.10.2022 Finance Luxembourg Regulation Sustainability

ESG disclosure: where do we stand and why is it so important?

Today, LuxFLAG launched the fourth edition of its Sustainable Investment Week on a broad range of topics – from Climate Finance to ESG and Impact Investing, in line with the Sustainable Development Goals. 

Undoubtedly the perfect opportunity to (finally) get a grip on what ESG and the EU Taxonomy mean.

While supporters say it is the most ambitious green investment rulebook ever, critics refer to it as greenwashing – so, what is the EU Taxonomy?

Published in the Official Journal of the European Union in June 2020, the EU Taxonomy is a system to classify which parts of the economy can be marketed as sustainable – including a list of activities and criteria that each must meet to earn a green label.

But how to apply such a regulation to bank lending?

For Banque Internationale à Luxembourg (BIL) Group Head of Sustainability, Alessandra Simonelli, since most of the ESG-related regulations are interconnected, banks may implement a global programme rather than handling them individually. By easing communication between risk and portfolio managers – or any team involved in the different regulations – the bank will have a better understanding of its needs in terms of ESG-related data for instance.

For Intesa Sanpaolo Senior Member of the Strategic Initiatives team Francesco Pirovano, another aspect that needs to be handled in a transversal way is training. Banks must provide training so everyone (especially front people) could be familiar with both the EU Taxonomy and ESG, and thus better engage clients.

To develop a proper ESG disclosure strategy (compliant with all the regulations into force) and reach your KPIs, “you also need endorsement from top management” – especially considering it is a relatively new topic some people internally did not get the importance of yet.

But developing such a strategy also requires new skills and task forces to better understand how the same information could be used from a portfolio management perspective, from an entity level disclosure perspective or from a risk management perspective – turning it into one of the biggest challenges banks are facing, according to ABBL Sustainable Finance Adviser Julien Froumouth.

So how do the panelists address this data challenge?

Alessandra Simonelli started the ball rolling. BIL opted for a data mapping approach to better understand which data it needs and how to collect it – from providers or directly from clients. The bank is also working with ABBL on national proxies, “to ensure full transparency and make data comparable and benchmarking.”

Last but not least, BBH Luxembourg Chief Risk Officer Mehtap Numanoglu also insisted on the ESG disclosures’ qualitative nature – you must have a clear and consistent narrative.