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SUSTAINABLE FINANCEA NEW GENERATION OF FINANCIAL LITERACY FEBRUARY 2018 INTRODUCTION: ABOUT BDO BDO: PROFILE AND POSITIONING BDO is one of the world’s leading auditing and consulting firms.

We are an entrepreneurial network and a professional partner for regional companies and global groups alike.

We aim to provide auditing and consulting services and support of the highest quality.

We act with foresight, create added value and proactively approach our clients.
BDO FINANCIAL SERVICES BDO’s strategy is ambitious: To further expand its strong market position in the financial services industry.

Today, BDO’s industry specialists provide consulting and auditing services to leading banks, investment managers and insurance companies.

More than 1,000 employees focus on financial services, including auditors, tax consultants, lawyers and other specialists, for example in the fields of compliance, IT, M&A and business valuation.
High quality, strong motivation and independence serve as a benchmark for everything we do.

1.

INTRODUCTION 2.

FOCUS ON SUSTAINABLE FINANCE 3.

A SHIFT IN THE INVESTMENT LANDSCAPE 4.

RESPONSIBLE LENDING AND GREEN FUNDING 5.


SUSTAINABLE FINANCE: HOW BDO CAN ASSIST THE FS INDUSTRY USEFUL CONTACTS BDO INTERNATIONAL US $ 8.1 billion 1,500 offices 73,850 2 6 1 2017 REVENUE iiii SUSTAINABLE FINANCE FOCUS ON SUSTAINABLE FINANCE At the Paris Conference in 2015 where the Accord de Paris (Paris Agreement) was negotiated, the developed countries reaffirmed the commitment to align financial flows with a pathway towards low-carbon and climate-resilient development.
As of January 2018, nearly 200 countries had signed the Paris Agreement.

As a result of the Paris Agreement, policy makers worldwide have started to evaluate how they can encourage or require banks, asset managers and institutional investors to adopt strategies that will support countries in meeting their commitments.

In the EU, the European Commission established a High-Level Expert Group on Sustainable Finance in 2016.
The expert group’s two main tasks are: to improve the contribution of the financial sector to sustainable growth, with particular focus on environmental sustainability; and to protect financial stability from risks related to environment, social and governance (ESG) dimensions.

The Commission also launched a public consultation.

– – – In its final report published in January 2018, the expert group stresses the importance of institutional investors and asset managers’ fiduciary duties (i.e.
care, loyalty and prudence) as they are already embedded in EU regulations including UCITS, AIFMD, MiFID II, Solvency II and IORP II.

Such obligations include the duty to act: in the best interest of beneficiaries/ investors; with due care, skill and diligence, including the identification and management of conflicts of interests; with honesty.

But do these obligations require assessment of the materiality of ESG factors?
Long before the Paris Conference of 2015, the concept of sustainability attracted attention from firms and stakeholders with regard to its benefits and what it is.

– – With the aim of developing guidelines for sustainability reporting, the Global Reporting Initiative (GRI) was formed, with the support of the United Nations Environment Programme (UNEP), in 1997.

In the EU, the CSR Directive (2014/95/EU) introduced measures that strengthen the transparency and accountability of firms.
Under the CSR Directive, large listed firms, banks and insurers with more than 500 employees are required to describe their business model and to report on environmental, employee and social-related, human rights, anti-corruption and bribery matters as well as on their diversity policy.

Firms are encouraged to rely on recognised frameworks such as GRI’s Sustainability Reporting Guidelines.

The first non-financial reports under the EU Directive were published in 2018.
Sustainability reporting affects firms of all industries, but can financing by banks make an impact on overall sustainable development?

– ‘ESG’ stands for Environmental, Social and Governance, the latter meaning corporate governance.

The term and ESG criteria were first introduced by the United Nations’ ‘Global Compact’ initiative The acronym ‘CSR’ stands for Corporate Social Responsibility.
CSR can be defined as the ethical principle that a firm should be responsible for how its behaviour might affect society and the environment X By applying ESG criteria in asset allocation, the financial X Introducing CSR into a bank’s process will add value to the sector may contribute to sustainable growth society and the environment 1.

INTRODUCTION 2.

FOCUS ON SUSTAINABLE FINANCE 3.

A SHIFT IN THE INVESTMENT LANDSCAPE 4.

RESPONSIBLE LENDING AND GREEN FUNDING 5.


SUSTAINABLE FINANCE: HOW BDO CAN ASSIST THE FS INDUSTRY USEFUL CONTACTS SUSTAINABLE FINANCE A SHIFT IN THE INVESTMENT LANDSCAPE Institutional investors and fund managers owe specific ‘fiduciary duties’ to their end-investors/ scheme members: Growth of Principles for Responsible Investments (PRI) Investor signatories – Pension funds and insurers in the EU use the guiding ‘prudent person principle’ as stipulated in the Solvency II Directive.
This principle encompasses a duty to act in the best interests of the beneficiary and to act prudently: ‘All assets […] shall be invested in such a manner as to ensure the security, quality, liquidity and profitability of the portfolio as a whole’ (article 132(2) Solvency II Directive).
The IORP II Directive goes one step further and explicitely refers to ESG factors: ‘Within the prudent person rule, Member States shall allow IORPs to take into account the potential long-term impact of investment decisions on environmental, social, and governance factors’ (article 19(1) IORP II Directive).

– Duties similar to the ‘prudent person principle’ apply to investment firms which are required to adhere to conduct rules.
Such rules are embedded in AIFMD (article 12), UCITS (article 25) and MiFID (article 24) and include a duty to act in the best interests of clients (duty of loyalty) and a duty to act professionally, and with due care and skill (duty of prudence).

75 50 25 0 1.

INTRODUCTION 2,000 1,500 1,000 500 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Assets under management ($tn) No.

of signatories 2.

FOCUS ON SUSTAINABLE FINANCE 3.


A SHIFT IN THE INVESTMENT LANDSCAPE Principles for Responsible Investment (PRI), the international network of investors founded in 2005 by then UN Secretary-General Kofi Annan, has developed six Principles, promoting a fuller consideration of ESG factors by institutional investors.
At the beginning of 2018, more than 1,750 signatories, from over 50 countries, representing approximately $70 trillion assets under management had signed up to the Principles (see graph).

Today, ESG factors are more and more part of the investment process: 4.

RESPONSIBLE LENDING AND GREEN FUNDING 5.


SUSTAINABLE FINANCE: HOW BDO CAN ASSIST THE FS INDUSTRY USEFUL CONTACTS – – – – Recognition among regulators, institutional investors and individual scheme members has grown that the interests of future beneficiaries are as relevant to the governance of pension funds as those of current members.

Rating agencies are looking at integrating ESG factors into their credit assessments and overall rating processes.
In today’s global and complex economy, managing environmental and social factors is part of sustaining competitive advantage.

As a consequence, professional investors regard ESG factors as being integral to assessing the quality of a company.

In recent years shareholders have suffered substantial losses following ESG risk events (see table).
Source: PRI Stock price performance one year following ESG risk event ESG risk event Date Upper Big Branch Mine explosion 5 April 2010 Deepwater Horizon oil spill Automobile airbag recall 20 April 2010 21 January 2014 Pharmaceutical accounting scandal 5 August 2015 Automobile emissions scandal 20 September 2015 Average loss to shareholders after 1 year Loss -53% -28% -54% -92% -26% -50% Source: Morgan Stanley Source: Morgan Stanley BDO CASE STUDY 1 BDO CASE STUDY 2 Client description: A Roman Catholic Diocese based in Europe.
The client had decades of experience in responsible investing as ESG factors are embedded in its mission and values.

Client objective: The client was looking for long-term capital preservation in a low interest rate environment.

Specifically, the Diocese wanted its investments not only to fuel future pensions but to also have a positive environmental and social impact.
BDO solution: We worked with the client to assess the investment guidelines in-force and recommend a set of strategies dedicated to increasing the level of disclosure on ESG factors as well as to defining an asset manager selection process.

Furthermore, the client implemented new investment guidelines.
Client description: An alternative investment firm, signatory to PRI and committed to providing institutional investors with alternative investment solutions, including photovoltaic, wind power, hydropower and similar ESG- relevant asset classes.

Client objective: The client’s expertise, built across the entire value chain, enables it to identify and manage attractive ESG investments for investors.

For certain asset classes, the client seeks due diligence and valuation assistance.
BDO solution: The client regularly engages BDO to assist its investment process with due diligence and valuation expertise.

BDO’s corporate finance specialists understand the challenges of business cases in alternative energy and can add value to the client’s value chain.

SUSTAINABLE FINANCE 1.

INTRODUCTION 2.

FOCUS ON SUSTAINABLE FINANCE 3.

A SHIFT IN THE INVESTMENT LANDSCAPE 4.

RESPONSIBLE LENDING AND GREEN FUNDING 5.


SUSTAINABLE FINANCE: HOW BDO CAN ASSIST THE FS INDUSTRY USEFUL CONTACTS RESPONSIBLE LENDING AND GREEN FUNDING REPORTING ON CSR – In response to increasing questions regarding how sustainability impacts their business (and vice versa), many companies have implemented CSR programmes, participate in voluntary initiatives and report on CSR standards.

Today, more than 6,000 companies worldwide communicate on progress each year.
– Under the CSR Directive, large EU firms, banks and insurers with more than 500 employees are now required to publish a non-financial report annually.

In preparing their non-financial report, financial institutions need to evaluate and present to which degree their responsible lending and funding add value to society and environment.
RESPONSIBLE LENDING – – Banks are increasingly aware of the corporate responsibility in all financing projects and have implemented mandatory in-house review processes and a comprehensive set of rules that reputation and sustainability risks relating to the environment, society or ethics are identified, analysed, and assessed early in the process of deciding on extending credit such as export financing, corporate loans or project financing.

See the illustrative example of a bank’s ES policy framework.
Growth of green bonds market Global issuance 150 100 50 0 2010 2011 2012 2013 2014 2015 2016 2017 Green bonds issuance ($bn) Source: Climate Bond Initiative, Moody’s GREEN FUNDING EXAMPLE: ES POLICY FRAMEWORK – Green bonds were created to fund projects that have positive environmental impact.

Proceeds from these bonds are earmarked towards green projects but are backed by the issuer’s entire balance sheet (see graph).
– Chinese financial institutions and corporations are the leading issuers of green bonds.

For example, Bank of China issued a triple-currency ‘climate bond’ of a volume worth $1.5 billion in November 2017.

The proceeds will be used to finance wind power projects in France and in the UK as well as 15 subway projects in China.

In December 2017, German bank LBBW issued its first own green bond of a volume of €750 million, the then-largest green bond issuance of a European bank.
The bond’s ‘Eligible Green Loan Portfolio’ consists of green commercial buildings and renewable energy projects.

– Deutsche Bank has implemented an Environmental and Social (ES) Risk Policy Framework that specifies the approach to defined sensitive sectors with high potential for significant ES impacts (e.g.

energy utilities, infrastructure projects in certain countries, monocultures in agriculture and forestry).

The framework defines responsibilities, processes and requirements for ES due diligence.
For example, as a result of an ES risk evaluation, the bank declined the opportunity of co-financing a hydro power plant because the project involved resettlement, but no resettlement plan was provided.

Source: Deutsche Bank BDO CASE STUDY 3 BDO CASE STUDY 4 Client description: A development bank providing debt and equity finance to private sector enterprises operating in developing and emerging-market countries, including long-term loans, mezzanine finance and equity capital to financial institutions.
Client objective: The client was considering acquiring a minority stake in an insurance company serving SMEs and retail clients in Southeast Asia.

BDO solution: BDO was engaged to carry out a financial and actuarial due diligence to assess the risks associated with the acquisition of a minority share.
Our work highlighted strengths and weaknesses of the target company as well as potential measures contributing to advancing developmental broad-based and structural effects and help further professionalisation.

Client description: A financial institution based in the EU with a business model focused on supporting SMEs, corporates and private equity clients with loans.

Client objective: Due to its size, the client is required to prepare a non-financial report under the CSR Directive.
The client had started the process of collecting, analysing and collating information in order to prepare the report.

BDO solution: BDO was commissioned as independent assurance services provider to verify the non-financial report.

The work also covered the client’s core lending and funding functions.

Based on the non-financial report, the client highlights its business integrity and improves its social, environmental and economic impacts.
By engaging BDO, the client increased the credibility of its non-financial reporting.

SUSTAINABLE FINANCE HOW BDO CAN ASSIST THE FINANCIAL SERVICES INDUSTRY Sustainable investments as well as responsible lending and funding may add value to society and environment.

The relevance of sustainable finance goes beyond pure corporate reporting as it should be embedded throughout the business model, including a bank’s core investment, financing and funding processes.
BDO’s Corporate Finance practices assist financial institutions throughout the M&A and investment process, encompassing services around: – Strategic advice to pensions funds, insurers and investment firms in relation to ESG-relevant investment guidelines and processes – Valuation and M&A transaction assistance (financial, regulatory, tax, legal due diligence) with special focus on financial institutions – Asset valuation and transaction assistance on investments in ESG-relevant asset classes including • Photovoltaic • Wind power • Hydropower • Healthcare 1.
INTRODUCTION 2.

FOCUS ON SUSTAINABLE FINANCE 3.

A SHIFT IN THE INVESTMENT LANDSCAPE – Debt and equity private placement advisory services (DCM, ECM) – Advice on compliance with regulatory requirements 4.

RESPONSIBLE LENDING AND GREEN FUNDING 5.

SUSTAINABLE FINANCE: HOW BDO CAN ASSIST THE FS INDUSTRY BDO as a leading global audit and consulting firm also provides services in relation to CSR reporting: – – Advice on CSR reporting processes (i.e.
engaging with stakeholders, revising materiality Independent assurance on non-financial reports assessments, managing risks, managing performance, implementing continuous improvements) USEFUL CONTACTS BDO CASE STUDY 5 Client description: A bank focused on financing projects and businesses including independent schools and kindergartens, organic farms, institutions using therapeutic pedagogy, health-food stores, communal living projects and sustainable businesses.
Client objective: For its private banking customers, the client was preparing the issuance of a green bond exclusively funding wind power projects.

BDO solution: BDO was engaged to assist the client with the preparation of the private placement, including the offering prospectus documents.

The combined BDO and BDO Legal team was comprised of seasoned financial services professionals, especially corporate finance experts and securities attorneys.
“A dramatic expansion in creative financing is going to be crucial for catalysing the transition to a low-carbon, sustainable world.
It is happening, but needs to happen with greater urgency, speed and scale.“ Patricia Espinosa Executive Secretary, UN Climate Change Source: HSBC “In this race against time, the banking and financial sector must be at the forefront of building a low-carbon economy.“ Jean-Laurent Bonnafé CEO, BNP Paribas Source: BNP Paribas “The world is changing for the better, and we stand with our clients as they imagine, create and build a broader transition to a low-carbon future.“ Michael L. Corbat CEO, Citigroup Inc.
Source: Citigroup SUSTAINABLE FINANCE FOR MORE INFORMATION ON SUSTAINABLE FINANCE CONTACT OUR GLOBAL FS CORPORATE FINANCE (CFFS) TEAM HEAD OF GLOBAL FS CORPORATE FINANCE – GERMANY Karsten Paetzmann Phone: +49 40 30293 513 karsten.paetzmann@bdo.de AUSTRIA Marcus Bartl Phone: +43 1 53737 416 marcus.bartl@bdo.at FRANCE Stéphane Hincourt Phone: +33 1 583604 30 stephane.hincourt@bdo.fr HONGKONG Kenneth Yeo Phone: +852 2218 8268 kennethyeo@bdo.com.hk HUNGARY Akos Boross Phone: +36 70 33691 84 akos.boross@bdo.hu INDIA Samir Sheth Phone: +9122 2439 3607 samirsheth@bdo.in IRELAND Richard Duffy Phone: +353 1 4700 513 rduffy@bdo.ie ISRAEL Moti Dattelkramer Phone: +972 3 637 4818 motid@bdo.co.il ITALY Stefano Variano Phone: +39 02 58201152 stefano.variano@bdo.it JERSEY Philip Braun Phone: +44 1534 510 100 pbraun@bdo.je LUXEMBOURG Daniel Croisé Phone: +352 45 123 396 daniel.croise@bdo.lu NETHERLANDS Marc Konsten Phone: +31 30 28497 15 marc.konsten@bdo.nl NORWAY Sigbjorn Selvik Phone: +47 90 6640 30 sigbjorn.selvik@bdo.no RUSSIA Anton Efremov Phone: +7 495 79756 65 av.efremov@bdo.ru SERBIA Uroš Ćamilović Phone: +381 11 3281 399 uros.camilovic@bdo.co.rs SPAIN Eduardo Pérez Ruiz Phone: +34 913 10 09 30 eduardo.perez@bdo.es SWITZERLAND Marcel Jans Phone: +41 44 44437 55 marcel.jans@bdo.ch UK Roger Buckley Phone: +44 121 352 6213 roger.buckley@bdo.co.uk US Matthew Goldberg Phone: +1 206 403 2473 mgoldberg@bdo.com FOR GENERAL INFORMATION ON SUSTAINABLE FINANCE CONTACT GLOBAL HEAD OF REGULATORY & PUBLIC POLICY AFFAIRS Noel Clehane Phone: +32 2 778 01 30 noel.clehane@bdo.global 1.
INTRODUCTION 2.

FOCUS ON SUSTAINABLE FINANCE 3.

A SHIFT IN THE INVESTMENT LANDSCAPE 4.

RESPONSIBLE LENDING AND GREEN FUNDING 5.

SUSTAINABLE FINANCE: HOW BDO CAN ASSIST THE FS INDUSTRY USEFUL CONTACTS SUSTAINABLE FINANCE BDO AG Wirtschaftsprüfungsgesellschaft, a German company limited by shares, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of indepen- dent member firms.
BDO is the brand name for the BDO network and for each of the BDO Member Firms.

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only.

The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without ob- taining specific professional advice.
Please contact BDO AG Wirtschaftsprü- fungsgesellschaft to discuss these matters in the context of your particular circumstances.

BDO AG Wirtschaftsprüfungsgesellschaft, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

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