Response to discussion Paper on management and supervision of ESG risks for credit institutions and investment firms (EBA/DP/2020/03)
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Article 42f 1 (b) is valid until today: "To the extent necessary for an understanding of the company's development, performance or position, the analysis [in the Annual Report / Management Report / "Lagebericht"] shall include both financial and, where appropriate, non-financial key performance indicators RELEVANT [or: material] to the particular business, including information relating to environmental and employee matters;"
The SD-KPI Standard 2010-2015 was the 1st global Standard for material ESG KPIs. Sustainable Development Key Performance Indicators (SD-KPIs) are three particularly material environmental, social and governance (ESG) indicators for the expected business development of 68 different GICS industries. Investors & analysts from Europe (Crédit Agricole Cheuvreux, Dexia Asset Management, Ethix SRI Advisors, GES Investment Services, Hermes, imug/EIRIS, Sarasin, Société Générale, Vigeo), USA & Canada (KLD Research & Analytics, RiskMetrics Group, Sustainalytics) and Japan (Social Investment Forum Japan, participating with analysts from 8 Japanese institutions) participated to define the SD-KPI and their weighting scientifically. They influenced USD 2 trillion of assets under management, cf. https://www.sd-kpi.com/files/SD-KPI_Standard_2010-2015_V2e, pages 12-14. Main focus of SD-KPIs was “protection of the environment” with 22,4% “Energy and greenhouse gas efficiency of production / products / services / distribution” & 11,6% “Proportion of products with ‘Design for Environment’ / Eco- or Fairtrade-Label”. For other E, S, G indicators please look inside the fully transparent Standard.
The current 2nd version of the SD-KPI Standard 2016-2021 has been the first global Standard of Standards. It was prepared by SD-M on behalf of the German Government, supported by US-SASB. English version: https://www.sd-kpi.com/en/sd-kpi-standards.html. A Japanese, Chinese and Arabic translation is also available. Russian and Brazilian versions to be released soon.
The 3rd version of the SD-KPI Standard 2022-2027 will be launched at the beginning of 2022.
https://www.sd-kpi.com/en/sd-kpi-standards.html
SD-KPI Standard 2010-2015: https://www.sd-kpi.com/files/SD-KPI_Standard_2010-2015_V2e
SD-KPI Standard 2016-2021: https://www.sd-kpi.com/files/SD-KPI_Standard_2016-2021.pdf
The Guidelines (German) to the Sustainability Code of the German Council for Sustainable Development recommend the SD-KPI Standards for materiality analysis (cf. http://www.sd-m.de/files/DNK_Leitfaden_2020_SD-KPI_Standard_auf_Seiten_21_35_123.pdf).
Together with the BMU, SD-M has also published the brochure "Material for business and financial performance – non-financial key performance indicators relevant to the particular business in the non-financial statement according to NFRD Directive 2014/95/EU" (German: https://www.sd-kpi.com/files/Wesentlich_2017.pdf).
The SD-KPI Standard 2016-2021 was revised by SASB (acknowledgements to Andrew Collins, Technical Director). SASB found “a high degree of overlap” in SD-KPI analysis and the SASB standards and appreciates the SD-KPI approach as well as how SD-M “ranked and prioritized topics for each industry.”
The SDKPI Standard 2016-2021 was further revised during a workshop at the German Environment and Building Ministry. Acknowledgements go to the following participants: Joachim Ganse (KPMG), Dr. Hendrik Garz (Sustainalytics), Tommy Piemonte (VigeoEIRIS/imug), Dr. Eckhard Plinke (Vescore), Marcus Pratsch (DZ Bank), Andrea Weber (Bank J. Safra
Sarasin) and Patrick Wirth (GES Switzerland).
The SD-KPInform database evaluates SD-KPIs for more than 12,000 companies worldwide quantitatively. SD-KPInform allows banks, asset owners, investment managers and index providers the systematic integration of material ESG indicators into loan origination, investment processes for equity and fixed income (SD-KPIntegration).
SD-KPI-tilted standard equity indices (EURO iSTOXX 50 SD-KPI, iSTOXX Europe 600 SD-KPI, ) and corporate bond standard indices (iBoxx Corporate SD-KPI / Solactive SD-KPIndex family) proof the materiality of SD-KPIs with higher yields / Sharpe Ratios in the long term.
These types of ESG transition strategies are already being implemented in consultation with www.zeb-consulting.com. The founder and shareholder of SD-M, Dr Axel Hesse, works here as Senior Manager Sustainable Finance, cf.
https://zeb-consulting.com/en-DE/sustainable-finance-expert-dr-axel-hesse-now-at-zeb
https://zeb-consulting.com/en-DE/sustainability
The Guidelines (German) to the Sustainability Code of the German Council for Sustainable Development recommend the SD-KPI Standards for materiality analysis (cf. http://www.sd-m.de/files/DNK_Leitfaden_2020_SD-KPI_Standard_auf_Seiten_21_35_123.pdf).
Together with the BMU, SD-M has also published the brochure "Material for business and financial performance – non-financial key performance indicators relevant to the particular business in the non-financial statement according to NFRD Directive 2014/95/EU" (German: https://www.sd-kpi.com/files/Wesentlich_2017.pdf).
1. Please provide details of other relevant frameworks for ESG factors you use.
SD-KPI Standards are other standards for material, industry-specific ESG KPIs, which have been developed by SD-M on behalf of the German Government since 2003, supported by Accountants, Asset Managers, Asset Owners, Brokers etc. (https://www.sd-kpi.com/en/sd-kpi-standards.html), according to Directive 2003/51/EC of the European Parliament and of the Council of 18 June 2003 amending Directives 78/660/EEC, 83/349/EEC, 86/635/EEC and 91/674/EEC on the annual and consolidated accounts of certain types of companies, banks and other financial institutions and insurance undertakings (cf. https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32003L0051).Article 42f 1 (b) is valid until today: "To the extent necessary for an understanding of the company's development, performance or position, the analysis [in the Annual Report / Management Report / "Lagebericht"] shall include both financial and, where appropriate, non-financial key performance indicators RELEVANT [or: material] to the particular business, including information relating to environmental and employee matters;"
The SD-KPI Standard 2010-2015 was the 1st global Standard for material ESG KPIs. Sustainable Development Key Performance Indicators (SD-KPIs) are three particularly material environmental, social and governance (ESG) indicators for the expected business development of 68 different GICS industries. Investors & analysts from Europe (Crédit Agricole Cheuvreux, Dexia Asset Management, Ethix SRI Advisors, GES Investment Services, Hermes, imug/EIRIS, Sarasin, Société Générale, Vigeo), USA & Canada (KLD Research & Analytics, RiskMetrics Group, Sustainalytics) and Japan (Social Investment Forum Japan, participating with analysts from 8 Japanese institutions) participated to define the SD-KPI and their weighting scientifically. They influenced USD 2 trillion of assets under management, cf. https://www.sd-kpi.com/files/SD-KPI_Standard_2010-2015_V2e, pages 12-14. Main focus of SD-KPIs was “protection of the environment” with 22,4% “Energy and greenhouse gas efficiency of production / products / services / distribution” & 11,6% “Proportion of products with ‘Design for Environment’ / Eco- or Fairtrade-Label”. For other E, S, G indicators please look inside the fully transparent Standard.
The current 2nd version of the SD-KPI Standard 2016-2021 has been the first global Standard of Standards. It was prepared by SD-M on behalf of the German Government, supported by US-SASB. English version: https://www.sd-kpi.com/en/sd-kpi-standards.html. A Japanese, Chinese and Arabic translation is also available. Russian and Brazilian versions to be released soon.
The 3rd version of the SD-KPI Standard 2022-2027 will be launched at the beginning of 2022.
2. Please provide your views on the proposed definition of ESG factors and ESG risks.
As the true materiality is expressed in the industry-specific definition, we would like to refer here to the detailed tables of contents of the copyrighted SD-KPI Standards. We further recommend reading the details of the SD-KPIs per industry, including the links to the source texts.https://www.sd-kpi.com/en/sd-kpi-standards.html
SD-KPI Standard 2010-2015: https://www.sd-kpi.com/files/SD-KPI_Standard_2010-2015_V2e
SD-KPI Standard 2016-2021: https://www.sd-kpi.com/files/SD-KPI_Standard_2016-2021.pdf
3. Do you agree that, for the purpose of assessing their inclusion in institutions’ and supervisors’ practices from a prudential perspective, ESG risks should be approached primarily from the angle of the negative impacts of ESG factors on institutions’ counterparties? Please explain why.
According to the BaFin Guidance Notice on Dealing with Sustainability Risks, ESG risks should be strategically considered, e.g. by means of SD-KPI Standard 2016-2021 (http://www.sd-m.de/files/BaFin_Guidance_Notice_Sustainability_Risks_SD-KPI_Standard_pages19-20.pdf). So from our perspective an holistic approach towards ESG risks is necessary, not just an exclusive view of the negative impacts of ESG factors.The Guidelines (German) to the Sustainability Code of the German Council for Sustainable Development recommend the SD-KPI Standards for materiality analysis (cf. http://www.sd-m.de/files/DNK_Leitfaden_2020_SD-KPI_Standard_auf_Seiten_21_35_123.pdf).
Together with the BMU, SD-M has also published the brochure "Material for business and financial performance – non-financial key performance indicators relevant to the particular business in the non-financial statement according to NFRD Directive 2014/95/EU" (German: https://www.sd-kpi.com/files/Wesentlich_2017.pdf).
8. Please provide your views on the relevance and use of qualitative and quantitative indicators related to the identification of ESG risks.
Quantitative Indicators are very important as well as the weighting of the material ESG KPIs for ESG scoring (for loan origination & asset management) of different asset classes like corporates & CRE.The SD-KPI Standard 2016-2021 was revised by SASB (acknowledgements to Andrew Collins, Technical Director). SASB found “a high degree of overlap” in SD-KPI analysis and the SASB standards and appreciates the SD-KPI approach as well as how SD-M “ranked and prioritized topics for each industry.”
The SDKPI Standard 2016-2021 was further revised during a workshop at the German Environment and Building Ministry. Acknowledgements go to the following participants: Joachim Ganse (KPMG), Dr. Hendrik Garz (Sustainalytics), Tommy Piemonte (VigeoEIRIS/imug), Dr. Eckhard Plinke (Vescore), Marcus Pratsch (DZ Bank), Andrea Weber (Bank J. Safra
Sarasin) and Patrick Wirth (GES Switzerland).
The SD-KPInform database evaluates SD-KPIs for more than 12,000 companies worldwide quantitatively. SD-KPInform allows banks, asset owners, investment managers and index providers the systematic integration of material ESG indicators into loan origination, investment processes for equity and fixed income (SD-KPIntegration).
SD-KPI-tilted standard equity indices (EURO iSTOXX 50 SD-KPI, iSTOXX Europe 600 SD-KPI, ) and corporate bond standard indices (iBoxx Corporate SD-KPI / Solactive SD-KPIndex family) proof the materiality of SD-KPIs with higher yields / Sharpe Ratios in the long term.
15. Please provide your views on the extent to which smaller institutions can be vulnerable to ESG risks and on the criteria that should be used to design and implement a proportionate ESG risks management approach.
Less is more. Focusing on a few industry-specific material ESG KPIs, e.g. the 3 different SD-KPIs in 68 industries, can enable a very efficient, risk-oriented ESG integration for small (and large) banks as well as for the assessment of SMEs, e.g. the "German Mittelstand" (and MNCs). An ESG scoring with material ESG KPIs should never use more than 10 ESG KPIs.17. Please provide your views on the proposed ways how to integrate ESG risks into the business strategies and processes of institutions.
SD-KPI-tilted standard equity indices (EURO iSTOXX 50 SD-KPI, iSTOXX Europe 600 SD-KPI, ) and corporate bond standard indices (iBoxx Corporate SD-KPI / Solactive SD-KPIndex family) proof the materiality of SD-KPIs with higher yields / Sharpe Ratios in the long term. --- Transferred to ESG integration in credit portfolio management, an overweighting of loans with higher SD-KPI values can thus be recommended and an underweighting of loans with lower SD-KPI values (ESG transition strategy of the whole loan book).These types of ESG transition strategies are already being implemented in consultation with www.zeb-consulting.com. The founder and shareholder of SD-M, Dr Axel Hesse, works here as Senior Manager Sustainable Finance, cf.
https://zeb-consulting.com/en-DE/sustainable-finance-expert-dr-axel-hesse-now-at-zeb
https://zeb-consulting.com/en-DE/sustainability
22. Please provide your views on the incorporation of ESG factors and ESG risks considerations in the business model analysis of credit institutions.
According to the BaFin Guidance Notice on Dealing with Sustainability Risks, ESG risks should be strategically considered, e.g. by means of SD-KPI Standard 2016-2021 (http://www.sd-m.de/files/BaFin_Guidance_Notice_Sustainability_Risks_SD-KPI_Standard_pages19-20.pdf).The Guidelines (German) to the Sustainability Code of the German Council for Sustainable Development recommend the SD-KPI Standards for materiality analysis (cf. http://www.sd-m.de/files/DNK_Leitfaden_2020_SD-KPI_Standard_auf_Seiten_21_35_123.pdf).
Together with the BMU, SD-M has also published the brochure "Material for business and financial performance – non-financial key performance indicators relevant to the particular business in the non-financial statement according to NFRD Directive 2014/95/EU" (German: https://www.sd-kpi.com/files/Wesentlich_2017.pdf).