Incorporating sustainability and ESG practises into banking

The shift towards sustainable and environmental, social and governance (ESG) investments

Although responsible, green, and ethical investing has existed for years, it has only recently seen a steep rise in demand – influenced in part by a growing awareness of sustainability, climate change and equality. And so, despite only occupying a small part of the total investment pool, it is beginning to have real impact. But how is this affecting the way wealth clients want to invest? And what must wealth managers do to keep up?

“Fund managers are increasingly recognizing the value of ESG and most mainstream managers are integrating ESG into their investment processes in one way or another.”

Hargreaves Lansdown

Integrating ESG and sustainability criteria into investment proposals

Investing in high-grade ESG/sustainability products no longer means sacrificing performance and returns

More and more, messaging around ESG investment focuses on an ability to exceed expectations – now and in the future. This could be with regards to how much of its budget a company sets aside for environmental issues, such as deforestation and waste output initiatives. Or it could be as simple as how much effort is being made to improve employee relations and diversity, as well as onsite health and safety conditions. On a grander scale, it could also mean looking at how much a company focuses on governance issues, such as board diversity and structure, or fighting back against bribery and corruption.

Figure 1: Environmental, social and governance (ESG) investment factors

All of which provides further evidence that when it comes to evaluating the desirability of a company, professional investors equate quality with ESG strength. Of course, investors will still always consider performance when selecting an investment manager. However, they would be inclined to remember that for the most part, investment management firms are beginning to focus more on ESG metrics as a way of attracting new clients. In addition, a rise in the number of data providers evaluating a company’s ESG principles are further driving the issue – and, importantly, standardizing metrics.

“The numbers back up the view that the capital markets are in the midst of a sea change…According to a 2018 global survey by FTSE Russell, more than half of global asset owners are currently implementing or evaluating ESG considerations in their investment strategy.”

Harvard Business Review

In these challenging times, an even brighter light has been cast on climate and social issues. Against this background, and with Europe still leading the way, there is a shift is happening towards ESG funds. Since mid-February 2020, ESG funds have outperformed previous benchmarks, which reveals that ESG investing, now and in the future, will become a priority for clients interested in positive environmental and social outcomes.

“The EU has also confirmed that green finance will be key in the post-pandemic recovery to stay on track with its sustainability goals.”

Credit Suisse

Figure 2: Sustainable funds continue growing despite the pandemic

Source: Credit Suisse research

The Avaloq Investment Suitability Framework

Unparalleled, data-rich support for relationship and asset managers

At Avaloq, we want to assist relationship and asset managers with the unparalleled, data-rich support to help them stay on top of client demand for ESG investment.

That is where our Avaloq Investment Suitability Framework comes into play perfectly suited for the rising popularity of ESG and, as a result, the growing need for dedicated data analytics.

Moving into the future, we envision a full integration of a range of ESG/sustainability criteria into investment proposal offerings. To achieve this requires initial client profiling as well as a strategic approach to the investments, as illustrated in figure 3:

Figure 3: Avaloq approach to ESG investments

Client profiling

Clients must be profiled for their ESG/sustainability preferences. But modelling these preferences can be complex due to the lack of standardization and relatively high amount of data that must be collected on:

  • environmental criteria such as GMO use, CO2/GHG emissions, water consumption, pollution, waste management, air emissions, paper usage and recycling;
  • social and corporate social responsibility (CSR) criteria focused on non-discrimination, responsible marketing, education, minimum wage, labour issues, ethics, and child/forced labour;
  • governance criteria including policies against bribery and corruption, insider trading, conflict of interest, competition, and money laundering.

Strategic investment

Clients may also want to avoid investing in “critical” industries like animal production, fishing, uranium, tobacco, alcohol, weapons, and gambling. They may also hold back on full adoption of the above criteria, instead requesting only a basic level of ESG/sustainability quality in their investments. This means that:

  • the proposed asset must come with classifications that match the client investment profile. Normally, these classifications are done at issuer level but can also take place at issue level (such as “green bonds”);
  • global market data providers are delivering this kind of data in addition to calculating a synthetic “rating” of the issuer, similar to the credit ratings of S&P, Fitch, and Moody’s.

"By embedding such processes into our solution, we have dramatically simplified the offering process, allowing financial institutions and wealth managers to deliver relevant services and expand their product suites outside of the traditional client segment of private banking.”

Giovanni Lietti

Product Manager at Avaloq AG, focus on Avaloq Core Platform

At Avaloq, we are using data science services to extract the highest business value from the data stored in our solutions to help stakeholders identify new trends and opportunities which can be quickly developed and rolled out within this new and exciting investment segment.

We are also working on integrating ESG/sustainability aspects into our wealth management front-office tool, with a view to deliver a fully digitalized experience for the investment service business. By offering our solution as either a BPaaS or SaaS model, users will be able to immediately leverage the ESG experience of a global community of financial institutions.

Lastly, but importantly, at Avaloq, we take our own responsibility seriously. Responsibility is a core part of our DNA and we have set an ambitious goal of reaching net zero emissions by Q3 2020. You can read more about this and other corporate social responsibility aspects by visiting our CSR page.

If you would like to hear more about how to incorporate sustainability and ESG practises into your banking processes, get in touch.

Our roadmap

Continuous improvement of our solutions – for the near and long term

We’re currently working on the integration of ESG/sustainability aspects into our wealth management front-office tool, with a view to being able to deliver a fully digitalized experience for the investment service business. Our BPaaS and SaaS delivery models mean that users will be able to immediately leverage the ESG experience of a large, global community of banks.

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