Defining the Future of Sustainable Finance


Capco’s recent third ESG webinar, following our two previous events looking at the big picture ESG challenges and the more specific issue of data in the ESG space respectively, took as its subject Integrating ESG Strategies and Risk Management in Financial Services. Co-hosted with international law firm Simmons & Simmons, the event brought together a distinguished panel: Anna Sophie Herken, Business Division Head at Allianz Asset Management; David Koenig, President and Chief Executive Officer of The DCRO Institute; and Johan van Duyvendijk, Head of CUSO Market & Treasury Risk Control at UBS.

Opening the webinar, Dr. Olaf Clemens, Partner and Global ESG Lead at Capco, highlighted that the approach adopted by firms towards ESG and related risks is evolving. “Currently many firms see ESG risk as somewhat ill-defined and hard to pin down, falling within their strategic risk or capital and liquidity management processes,” Olaf said. “However, in time the expectation is that ESG risk will come to be viewed as a transverse risk, cutting across different risk categories – operational, market, credit, liquidity, and conduct. How, then should sustainability risks and the different facets of E, S and G be integrated into the risk management framework?”

The panel session that followed kicked off with a discussion of how senior executives from management boards and supervisory boards should – with the shorter-term view of shareholder value creation – be given the more distant longer-term horizon of ESG-related risks and impacts. A shift in focus from capital in relation to financial structure towards human, technological and intellectual capital was flagged by the panel alongside a greater focus on transparency – so it is now a matter of ensuring boards have the right tools to effect medium and longer term change.

The focus of the discussion then turned to the potential impact of rising consumer prices, inflationary pressures and geopolitical upheaval on national and international efforts to attain the UN Sustainable Development Goals (SDGs). The panel acknowledged the negative impact of various headwinds and shifted priorities, and the threat that progress on SDGs might consequently slow. It was noted that if the public sector is not able to finance SDGs, the onus will inevitably shift onto the private sector to take a lead.

“The pandemic and the invasion of Ukraine have shifted priorities for so many countries – inter alia, with more defence spending and humanitarian aid – and we are also dealing with the rising energy crisis,” Anna Sophie Herken said. “This shift will likely have a negative impact, at least for the short term on financing the SDGs and green agenda but also financing flows from the global North to the global South. At the same time, we are also facing a threat that we will go back on what has already been achieved with SDGs. There is a conflict between the urgency to meet SDGs ranging from poverty reduction through environmental targets and constraints on public budgets and cuts in development aid.” 

The challenge relating to emerging markets will – due to the nature of existing infrastructure and other factors – continue to manifest a large demand for hydrocarbons. While greener infrastructure can be rolled out in Europe and the US, it is less easy to achieve across large swathes of the globe. This near-term reality needs to be recognized if longer-term transition commitments and progress are to be secured, so the shepherding of brown companies into green corporate citizens will need to be sensitively handled. Financial and other incentives will be required more generally, it was agreed. Clearly, financial services organizations have a pivotal role here in particular.

Today’s global supply chains are complex adaptive systems that have moved from a state of temporary equilibrium to a period of volatility. It must be recognized that the amplification of risks arising from that volatility can extend much further than one might imagine. When it comes to planning for risks in a brave new ESG-centric world, it was agreed that quality data – and the transparency it offers – will be critical. The focus should therefore be on implementing frameworks for data capture that, if not wholly perfect in the short term, over the longer term can be enhanced so that ESG-related shortfalls can be identified, and risk assumptions can be made accordingly. This will allow risks to be hedged down and realistic risk appetites to be determined.

As Johan van Duyvendijk noted: “Good data quality and transparency allow me to see how non-linear my risk is in different portfolios. Today we see a lot of shorter-term contracts where the optionality is low, but as we move through time and ESG becomes a more developed product, optionality will become high. And when you get that optionality embedded in the market, that is where you start seeing more non-linear risk and bigger fallout around that as people starting to look for forms of arbitrage and temporary pricing factors of that nature. So the most critical thing is to implement frameworks for quality data capture [to] have good transparency into the risk being run. If you can see the risk, you can manage it dynamically.”

For his part, David R. Koenig highlighted that there are a significant number of companies whose ESG risk, both good and bad, is not accurately captured by traditional investment analysis. “Everything about risk is forward looking,” he said. “When we talk about where risk should be governed at the board level, boards often place risk governance responsibilities with an Audit Committee and call it their Audit and Risk committees. Yet Audit Committees backwards-looking and validating while risk is forward-looking and anticipatory. This forward-look takes a different mindset. Investment analysis are in a really difficult situation when trying to assess what  the future distribution of outcomes for any company looks like. And this is where governance and ESG factors and transparency come in. Is the board encouraging management to structure the organization so it can change the shape of the future? Is it able to respond to surprises on the downside? Is it looking for opportunities to innovate to extend the upside?” 

In closing, the panel were invited individually to name the biggest threat to ESG initiatives. One such threat cited was the inability to maintain a long-term perspective, particular given the tendency of governments around the world to flip-flop on ESG commitments depending on which party holds power. Short-term pricing of assets, giving rise to transition risk, was another. And given the multiplicity of consequences that flow from it, climate change was a clear final choice.

In a closing, Dr. Olaf Clemens highlighted some of the key takeaways from the event:

  • ESG in the context of risk management is not completely new to corporates. They are interested in long-term value creation, but to enable that boards need the right tools and management information systems to inform their decisions.
  • ESG comes with many opportunities which require a very significant involvement on the part of the private sector. However, transparency is essential here to manage portfolios and risks arising from innovations as investors look for opportunities to arbitrate risks over time.
  • Existing risk management models may not yet be fully fit for purpose, as they are unable to cover all aspects of E, S, and G risk factors correctly. Financial institutions should seek our new perspectives on ESG to surface and address potential risks. 





Anna Sophie Herken

Anna Sophie Herken, a German – Swedish national, brings more than 20 years of ESG related practice and exposure across sectors and industries. Currently, she is Business Division Head at Allianz Asset Management GmbH and as part of that role also covering ESG finance. She is a Member of the Board of Allianz Life (USA), Member of the Board of CPIC Fund Management Co. Ltd. (China) and also serves as President and Chair of the Board of the Allianz Foundation for North America.

Previously, she held various international positions, e.g. as CFO of Hasso Plattner Capital, Managing Director of the Hertie School of Governance GmbH, held senior positions at the World Bank in Washington DC and the European Bank for Reconstruction and Development. She also worked for the German government where she served as delegate and negotiator at the World Summit on Sustainable Development 2002 as well as in various other international fora incl. G8, OECD, EC, UN/ UNEP. Anna is a lawyer by training, having studied in Germany, France and the US and also holds a MBA from the University of Cambridge.

David R. Koenig

David R. Koenig is the award-winning author of Governance Reimagined: Organizational Design, Risk, and Value Creation and The Board Member's Guide to Risk. He has served on both for-profit and non-profit boards and as a chief executive officer. He created corporate risk management programs at three different companies and has managed complex financial portfolios in excess of tens of billions of dollars in size. He is the President and CEO of The DCRO Institute, serves on the editorial board of the Journal of Risk Management in Financial Institutions, is the founder of the Directors and Chief Risk Officers group (the DCRO), and is a co-founder of the Professional Risk Managers International Association (PRMIA).

Johan van Duyvendijk 

Johan van Duyvendijk is a Managing Director within UBS's Group Risk Control Department. He is the Head of the CUSO Market & Treasury Risk Control Team, as well as the CUSO Lead for the implementation of the bank’s Climate Risk Strategy. Johan and his team are responsible for the development and implementation of the bank’s overall Climate Risk Framework, including stress testing. As part of this build-out, Johan’s team is also responsible for ensuring that the business lines have proper risk identification and management practices in place. 

Before starting at UBS, Johan was a Managing Director at State Street, responsible running the Quantitative Analytics Team for Global Treasury, primarily focused on model development.  Johan holds an MBA from Westminster College.