#1KPMG Sustainable Finance (ESG) Presentation to Insurance Ireland 22 July, 2020#2With you today... Visit www.kpmg.ie/esg KPMG Conor Holland Director ESG Asset Management KPMG Ireland T: +353 (1) 700 4335 E: [email protected] Shane O'Reilly Director Corporate Finance KPMG Ireland T: +353 (1) 700 4654 E: [email protected] © 2020 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 2#3Overview of landscape 1#4It is a broad subject... KPMG Impact Investing Responsible Investing Screening & Active Ownership Green and Social Bonds Water Waste Resource scarcity Decarbonisation / energy transition Circular Economy Climate change Environmental Biodiversity Supply chain Reward and recognition Social Sustainable Finance Sustainability Labour standards Conduct Human Rights Communities Anti-bribery & corruption Culture Governance Diversity & Inclusion Modern Slavery Responsible tax Transparency Corporate Governance Training & Development Local Engagement & Employment Health & Safety © 2020 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 4#5Sustainable Finance Update 8 KPMG Sustainable Futures Definition of Sustainable Finance? 'Sustainable finance' generally refers to the process of taking due account of environmental, social and governance (ESG) considerations when making investment decisions, leading to increased investment in long term and sustainable activities. For example... KPMG E Environmental issues: Climate change Carbon emissions Air and water pollution Deforestation ° Water management 0 Water scarcity S Social issues: Human rights Labour standards Social inclusion Date protection and privacy Gender and diversity G Governance related issues: Executive remuneration Risk management Boards and committee composition Whistle-blower policy lobbying © 2020 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. сл 5#6Why Act? Why Sustainable Finance? Environmental risks occupy the top right quadrant of the Global Risks Landscape of 2020 Global Risks Landscape 2020 Source: Global Risks Insight Report 15th Edition, World Economic Forumimate action 4.0 (202 failure Top Global risks in terms of likelihood and impact include........ Climate Action Failure Biodiversity Loss Extreme Weather Weapons of mass destruction Biodiversity loss Extreme weather Water crises Categories Information infrastructure breakdown Natural disasters Cyberattacks Economic Infectious diseases Human-made environmental disasters Environmental Geopolitical Water Crisis Interstate conflict Global governance failure Food crises Natural Disaster Cyber-Attacks 3.5 3.47▸ Financial failure average Fiscal crises Involuntary migration Data fraud or theft Human-Made Environmental Disasters (pollution) Unemployment Asset bubbles Global Governance Failure Impact Critical infrastructure failure Social instability National governance Likelihood Interstate Conflict Involuntary Migration KPMG © 2020 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. Societal Technological 6#7ESG strategies Comparison of strategies/approaches..... Exclusion of holdings from investment universe Norms based on screening Sustainability themed investment ESG strategies Engagement and voting on sustainability matters Impact investing Best-in-class investment selection ESG integration KPMG © 2020 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 7#8ESG investment - Where do we stand? Chart 1: Compared to five years ago, how sustainable important has become to you? investing Chart 2: Compared to five years ago, how have your investments in sustainable funds changed? 1% 1% KPMG 19% 32% 46% Significantly more important Somewhat more important No more important Somewhat less important ■ Significantly 1% 1% less important 27% 4% 4% Significantly increased Slightly increased 21% No change 43% Slightly decreased Significantly decreased Used to invest in sustainable investments but don't anymore Have never invested in sustainable investments and still don't © 2020 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. Source: Schroders Global Investor Study 2017 00 8#9ESG investment - Where do we stand? Huge global investor commitment: $82 trn AuM of PRI Signatories - roughly 40% of the total global outstanding bonds and equities... 90 80 Assets under management (US$ trillion) 30 20 10 222° 70 60 50 40 Nº Signatories 2500 2000 1500 1000 500 0 Assets under management (US$ trillion) Asset Owners AUM ($ US trillion) Number of Asset Owners Number of Signatories Source: PRI 2019, The World Federation of Exchanges 2019, BIS 2019 KPMG © 2020 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 9#10ESG investment - Where do we stand? Relative Google Search Volume of topic "ESG" in Finance context, globally: 10-times increase in the last 5 years. Regional concentration of relative Google Search volume of topic "ESG" in Finance context. 120 100 80 60 40 20 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Numbers represent search interest relative to the highest point on the chart for the given time. A value of 100 is the peak popularity for the term. A value of 50 means that the term is half as popular. A score of 0 means that there was not enough data for this term. The regional point score of 100 is given to the location where the highest popularity was achieved in proportion to the total number of search queries. Source: Google Trends 2019 KPMG © 2020 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 10 10#11Engagement and Voting Proxy voting: Topics on AGM'S, ESG on the rise Amongst investor's top 5 priorities in 2018@ Increased attention to climate risk and the environment (EY 2019) Climate change is a "significant risk factor" Most common shareholder proposals submitted in 2017. 79% Proposal Proposals submitted Proposals withdrawn Adopt/amend proxy access 157 36% Review/report on lobbying activities 53 21% Enhanced reporting needs to be a priority Appoint independent board chair 49 10% 48% (over changing strategy, practices) Review/report on political spending 49 35% Address human rights 40 33% Review/report on greenhouse gas emissions 36 53% 30% Changes to company strategy need to be a priority (over enhanced reporting, changing practices). Review/report on pay inequality 34 44% Address corporate EEO/diversity 32 48% Report on sustainability 31 55% Review/report on climate related risks 29 31% KPMG Source: EY (2019) © 2020 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 11#12Empirical evidence about ESG and performance. MSCI World SRI vs. MSCI World (since inception). MSCI EM ESG Leaders vs. MSCI EM (since inception). 120.0% 100.0% 100.0% 80.0% 60.0% 40.0% 20.0% -60.0% 0.0% -20.0% 07 -4.0% 01.08.200 .08.2009 01.0010 01.08.20 MSCI World SRI (Net Return, USD) 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% KPMG 01.08.2007 01.08.2008 01.08.2009 01.08.2010 01.08.2011 01.08.2012 01.08.2013 Active Return MSCI World SRI vs. MSCI World (both Net Return, USD) 01.08.20 01.08.2013 01.08.2014 01.08.2015 01.08.2016 01.08.2017 01.08.2018 80.0% 60.0% 40.0% 20.0% 0.0% MSCI World (Net Return, USD) 80.0% 70.0% 60.0% 50.0% 40.0% 01.08.2014 01.08.2015 01.08.2016 01.08.2017 01.08.2018 30.0% 20.0% 10.0% 0.0% -10.0% © 2020 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 01.08.2007 01.08.2008 01.08.2009 -20.0% 0 -40.40% -60.0% -80.0% 01.08.200 01.08.2009 01.08.2010 01.08.2011 01.08.2012 01.08.2013 01.08.2014 MSCI EM ESG Leaders (Net Return, USD) MSCI EM (Net Return, USD) 01.08.2010 01.08.2011 01.08.2012 01.08.2013 01.08.2014 Active Return MSCI EM ESG Leaders vs. MSCI EM (both Net Return, USD) Source: MSCI, Bloomberg 01.08.2015 01.08.2016 01.08.2017 01.08.2018 01.08.2015 01.08.2016 01.08.2017 01.08.2018 12#13Integrating ESG into Asset Allocation KPMG Integration Alignment Impact - A top-down process: ESG objectives (financial and non-financial) Investment Strategy Investment Policy Asset Allocation A high-level strategic plan for achieving investment objectives (based on understanding of fiduciary duty, investment convictions, beliefs, principles). Stakeholder Communication tool; outline of investment objectives; guidance on investment processes; guidance on standards for measuring success/performance. Allocation of investment capital across asset classes/categories. Source: Sustainalytics (2019) © 2020 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 13#14Why integrating ESG is relevant to insurers? . We are currently witnessing a growing appetite of financial actors to understand the relationship between ESG factors and entities' improved performance the insurance industry is no exception. Environmental - As the largest institutional investor group in Europe ― and operating within long investment horizons - insurance companies play a major role in financing the move to a low-carbon economy. As risk managers, insurers play a central role in identifying and measuring material ESG risks - particularly climate. Consequently, to remain competitive, insurers need to adapt and innovate while factoring the above- mentioned risks into their strategic decision-making process. Greenhouse gases Social Mii Workforce and diversity Governance KPMG 哑。 Waste Water Land use くくく 四川 Safety management Customer engagement Communities Structure and oversight Code and values Transparency and reporting Cyberrisks and systems © 2020 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 14#15ESG is becoming more mainstream in Insurance with the development of ESG methodologies and frameworks. Pressure has been mounting on insurers to further consider ESG issues to meet their financial objectives. • • Credit rating agencies such as Moody's are including ESG factors into their ratings to better evaluate companies' risk of default. As a result, they have identified high exposure and extensive vulnerabilities in the insurance sector. Insurers are beginning to respond to the changing landscape. In 2019, the PSI and Allianz launched the first guide to managing sustainability risks in insurance underwriting – providing guidance on how to integrate ESG risk consideration into due diligence and core business decision making. Other entities have followed suit. • KPMG Given insurers' broad asset range of portfolios, their exposure to ESG risks such as climate change is increasing, potentially damaging their value drastically. Z ZURICH Allianz Aberdeen Standard Investments AXA © 2020 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 55 15#16Profit or purpose? Both! KPMG Financial Motive Primary motive: 'Use ESG-Information for better valuation and investment-decisions' Sustainability Motive Primary motive: 'Generate an effect/impact through sustainable & responsible investing practices' (e.g. health improvement, sustainable land use, reduction in poverty) social preference and social signalling. Secondary motive: 'Earn at least market-conform returns with sustainable & responsible investing solutions' (risk and return) © 2020 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 16#17Regulatory developments#18Tackling Climate Change is now at the core of EU policy Policy Drivers Climate science Paris Agreement UN 2030 Agenda for Sustainable Development Action Plan on Sustainable Finance 1) Re-orient capital flows through sustainable investments 2) Mainstreaming sustainability risk into risk management 3) Foster transparency and long-termism in markets Globally or Asia ? NGFS S Coalition of the willing, gathering Central Banks and Supervisors, working on climate and green finance issues ESMA EIOPA EBA KPMG © 2020 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 18#19EU Action Plan on Sustainable Finance Key challenges No common definition of "sustainable investment" Risk of "greenwashing" of investment products Banks and insurers often give insufficient consideration to climate and environmental risks Investors often disregard sustainability factors or underestimate their impact Too little information on corporate sustainability-related activities Actions EU classification (taxonomy) for sustainable activities Standards and labels for 'green' financial products give investors certainty Study if capital requirements should reflect exposure to climate change and environmental risks Clarify institutional investor duties to consider sustainable finance when allocating assets Enhancing non-financial information disclosure KPMG Taxonomy Disclosures Benchmarks Green Bond Standard © 2020 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 19 19#20EU Action Plan at a glance I. Regulation creating "green" classification system for economic activities ("Taxonomy Regulation") 5. Better advice to clients on sustainability Action Plan Key Elements 2. 3333333 Regulation on disclosures relating to sustainable investments and sustainability risks ("Disclosures Regulation") KPMG 4. Integration of sustainability in risk management, organisational requirements, operating conditions and target market assessments 3. ut New low-carbon benchmark indices (via amendment to Benchmarks Regulation) 2020 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 20 20#21The Disclosures Regulation KPMG Disclosures Regulation ■ The Disclosures Regulation requires AIFMS and UCITS management companies (amongst others, but for the purposes of these slides, we focus on investment funds and their managers) to consider and disclose in a consistent and harmonised manner how ESG factors are adopted in their decision making processes. It aims to harmonise disclosure standards among EU member states to facilitate the comparability of different financial products and services. Many of the provisions of the Disclosures Regulation apply to all asset managers, whether or not they have an express ESG or sustainability focus. The Disclosures Regulation applies different requirements and implementation timeframes in respect of disclosures on websites, in prospectuses and in periodic reports. When will the Disclosures Regulation apply? ■ The main provisions of the Disclosures Regulation apply from 10 March 2021. The requirements relating to disclosures in the periodic reports of ESG- focused products are stated to apply from 1 January 2022, which would appear to suggest that reports published after that date (as opposed to reports relating to periods starting on or after that date) should include the required disclosures, but this may be clarified in the technical standards. © 2020 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 21 24#22Disclosures Regulation Disclosure Obligations Applicable to All Funds Website What's required? Sustainability risk policies Adverse sustainability impacts Remuneration policies Information about their policies on the integration of sustainability risks in the investment decision-making process. Publish and maintain on website: • • a statement on due diligence policies regarding the principal adverse impacts of investment decisions on sustainability factors; or clear reasons why they do not consider the adverse impacts of investment decisions on sustainability factors.* Include in remuneration policies information on how those policies are consistent with the integration of sustainability risks and publish this information on website. Prospectus Disclosures Sustainability risks and sustainable investments Firms must disclose: • the manner in which sustainability risks are integrated into their investment decisions; the results of assessments of the likely impacts of sustainability risks on the returns of the financial products they make available; and where the manager considers principal adverse impacts of investment decisions on sustainability factors, whether, and if so how, each financial product considers principal adverse impacts on sustainability factors.** Marketing communications must not contradict any information disclosed under the Disclosures Regulation. * From 30 June 2021, financial market participants with more than 500 employees or which are parent undertakings of large groups with more than 500 employees must publish and maintain on their websites a statement of their due diligence policies with respect to the principal adverse impacts of investment decisions on sustainability factors. ** This requirement applies from 30 December 2022. KPMG © 2020 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 22 22#23Disclosures Regulation Additional Disclosure Requirements for Expressly ESG Focused Products Products promoting environmental and social characteristics Products that have sustainable investment as their objective Products promoting environmental and social characteristics and products that have sustainable investment as their objective KPMG Prospectus should disclose: information on how those characteristics are met; where an index has been designated as a reference benchmark, information on whether and how the index is consistent with those characteristics; and information as to where the methodology used for the calculation of the reference index can be found. Where a financial product has sustainable investment as its objective and an index has been designated as a reference benchmark, the following will need to be included in the prospectus: ⚫ information on how the designated index is aligned with the objective; • an explanation as to why and how the designated index aligned with that objective differs to a broad market index; and information as to where the methodology used for the calculation of the reference index can be found. Where no index has been designated, pre-contractual disclosures will include an explanation of how the sustainable investment objective is to be attained. Website to provide the following information: • • a description of the environmental or social characteristics or the sustainable investment objective; information on the methodologies used to assess, measure and monitor the environmental or social characteristics or the impact of the sustainable investments selected for the financial product, including its data sources, screening criteria for the underlying assets; and ⚫ the relevant sustainability indicators used to measure the environmental or social characteristics or the overall sustainable impact of the financial product. Periodic reports to include the following information • the extent to which environmental and social characteristics are met; ⚫ the impact of sustainable investments by means of relevant sustainability indicators; and where an index has been designated as a reference benchmark, a comparison will be needed between the overall sustainability-related impact of the financial product with the impacts of the designated index and of a broad market index through sustainability indicators. © 2020 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 23 23#24The Taxonomy Regulation • • • Proposal The proposal to create a sustainability taxonomy was devised to provide market clarity on what economic activities should be considered "sustainable". The Taxonomy Regulation aims to develop a taxonomy for climate change and environmentally sustainable activities so that the classification system can be used with respect to labels, standards and benchmarks recognising compliance with environmental standards across the EU. Importantly, the Taxonomy Regulation does not establish a label for sustainable financial products. It sets out criteria for determining if an activity (not a company or asset) is environmentally sustainable, including whether the activity contributes to, or does not significantly harm, one or more specified environmental objectives. When will the Taxonomy Regulation apply? • • Scope The Taxonomy Regulation applies to a broad range of financial market participants, defined to include AIFMs, UCITS management companies, and financial products (including AIFs and UCITS). For the most part, the Taxonomy Regulation will be relevant to asset managers who make available a financial product, such as an investment fund, which either: (a) has an objective of environmentally sustainable investment; or (b) "promotes environmental characteristics". However, even managers of out-of-scope financial products will need to make the negative disclosure set out overleaf confirming that the product is out of scope of the regulation. Political agreement on the Taxonomy Regulation was reached in December 2019 and the agreed text was published on 18 December 2019. The Taxonomy Regulation will apply, with respect to activities that substantially contribute to climate change mitigation and adaptation, by 1 January 2022. The regulation will apply with respect to activities that substantially contribute to the other environmental objectives by 1 January 2023. KPMG © 2020 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 24 24#25The Taxonomy Regulation Interaction with the Disclosures Regulation The Taxonomy Regulation is closely linked to the Disclosures Regulation. While the Taxonomy Regulation provides a common language for firms and investors to identify which economic activities are "environmentally sustainable", it also includes supplemental disclosure obligations to those set out in the Disclosures Regulation. What additional disclosures are required by the Taxonomy Regulation? Where a financial product has "sustainable investment" as its objective within the meaning of the Disclosures Regulation, the information to be disclosed in the prospectus and annual report must include: information on the environmental objective or environmental objectives to which the investment underlying the financial product contributes; and a description of how and to what extent the investments underlying the financial product are invested in environmentally sustainable activities. This description must specify the share of investments in environmentally sustainable economic activities, including details on the respective proportions of enabling and transition activities, as a percentage of all investments underlying the financial product. Where a financial product "promotes environmental characteristics", the prospectus and annual report should include the following statement: "The "do no significant harm" principle is applied only for the investments underlying the product that take into account the EU criteria for environmentally sustainable investments. The investments underlying the remaining portion of this financial product do not take into account the EU criteria for environmentally sustainable investments." Where a financial product is not: (a) a financial product with sustainable investment as its objective; or (b) a financial product that promotes, among other characteristics, environmental or social characteristics within the meaning of the Disclosures Regulation, the prospectus and annual return must include this statement: "The investments underlying this financial product do not take into account the EU criteria for environmentally sustainable investments." KPMG © 2020 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 25 25#26FMPS are defined in Article 2(1) Disclosure Regulation Uses and Users of the Taxonomy Asset Management Disclosure Obligations UCITS Funds: Equity funds • Exchange-traded funds ("ETFs") Bond funds Alternative Investment Funds ("AIFS"): Fund of funds Real estate funds Private equity or SME loan funds Venture capital funds Infrastructure funds Portfolio management Optional Additional Uses Insurance • Insurance-based investment products ("IBIP") • Insurance (selected non-life LOBs) • Institution for occupational retirement provision ("IORP") Corporate & Investment Banking Retail Banking Securitisation funds* Venture capital and private equity funds Portfolio Management Indices funds Securitisation Venture capital and private equity Indices Project finance and corporate financing Mortgages Commercial building loans Car loans, Home equity loans KPMG © 2020 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 26 26#27Challenges KPMG $ @ Adequacy of disclosures by Investee Undertakings One of the potential challenges identified by industry in relation to the fulfilment of the Action Plan's objectives is the lack of reliable and comparable ESG data from investee companies. The Taxonomy Regulation includes provisions regarding the transparency of undertakings that come within the scope of the Non-Financial Reporting Directive ("NFRD"), which would require large companies (public interest entities with more than 500 employees) and parent undertakings of large groups with more than 500 employees subject to the EU Accounting Directive (Directive 2013/34/EU) to include in their non- financial statement, or consolidated non-financial statement, information on how and to what extent the company's activities are associated with environmentally sustainable economic activities. The Commission will publish the detailed disclosure requirements by 1 June 2021 and the requirements will apply from 30 June 2021. $ © 2020 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 27 27#28Low Carbon Benchmarks Regulation KPMG The Low Carbon Benchmarks Regulation amends the existing EU Benchmark Regulation by introducing two new types of benchmarks: EU Climate Transition benchmarks; and EU Paris-aligned benchmarks. In addition to the introduction of these new benchmarks, the amendments require benchmark administrators to update all benchmark statements (excluding those relating to interest rate and currency benchmarks) by 30 April 2020 to include "...how ESG factors are reflected in each benchmark ...". For benchmarks that do not pursue ESG objectives, it will be sufficient "... to clearly state in the benchmark statement that they do not pursue such objectives". Benchmark administrators that pursue ESG objectives will be required to publish key elements of their methodologies. The Commission will adopt delegated acts to provide further detail on the minimum standards for each of the new benchmarks and the requirements applicable to benchmark administrators. Administrators of significant benchmarks ie, benchmarks that are above a certain threshold in terms of usage, will be required to disclose the degree of "Paris alignment" of those benchmarks and must endeavour to provide a Transition benchmark by 1 January 2022. The Low Carbon Benchmarks Regulation entered into force on 10 December 2019. © 2020 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 28#29EU Sustainable Finance Framework The Sustainable Action Plan also included a number of legislative proposals, one of which resulted in the adoption of the Disclosure Regulation. → There are many other legislative proposals in various stages of the EU's legislative process which will start to become effective from 2020 onwards. KPMG Disclosures Regulation Taxonomy Regulation Benchmarks Regulation MiFID and IDD UCITS AND AIFMD Corporate Non-Financial Disclosure Green Bonds EU Ecolabel Corporate Governance CRR / Solvency II Credit Ratings Consistent Disclosure Requirements in Relation to Sustainability A unified classification system for sustainable activities Standardised sustainability benchmarks for green products Including sustainability considerations in financial advice Integrating sustainability risks and factors into UCITS and AIFMD Strengthening ESG data reporting and accounting rule-making A common green bond standard to increase comparability andtransparency Common EU Ecolabel for sustainable products, including financial products Fostering sustainable corporate governance and collecting evidence of undue short-term pressure from capital markets Incorporating sustainability into prudential requirements Integrating sustainability in ratings and market research © 2020 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 29 20#30Renewed Sustainable Finance Strategy • • • • • ESG specific laws will have a knock-on impact and, in many cases, result in amendments to existing requirements for Investment Managers, e.g. amendments are proposed to the UCITS, AIFM and MiFID Directives The European Green Deal, in tandem with the recovery from the COVID-19 crisis will significantly increase the investment efforts needed across all sectors - a green recovery? A Renewed Sustainable Finance Strategy was launched in April 2020 to: • • Contribute to the objectives of the European Green Deal Investment Plan, in particular to create an enabling framework for private investors and the public sector to facilitate sustainable investments; and Build on previous initiatives and reports, such as the Sustainable Action Plan and the reports of the Technical Expert Group ("TEG") on Sustainable Finance The EU has launched a consultation which will close on 15 July 2020 Other developments • • European Supervisory Authorities ("ESAS") have issued a public consultation on proposed regulatory technical standards ("RTS") with regard to content, methodology and presentation of sustainability-related disclosures. Six of these RTS must be delivered by 30 December 2020 and one must be delivered by 30 December 2021. Draft RTS address areas from "do not significantly harm" principle to guidance on nature and extent of pre-contractual exposures, website disclosures and content required in ESG periodic reports. Work on amendments to level 2 rules for UCITS, AIFs have stalled owing to regulatory focus on liquidity management and leverage. KPMG © 2020 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 30#31What other reporting regimes should I be aware of? Non-financial reporting initiatives. EU • Non-financial reporting initiatives Guidelines of reporting www.eurlex.europa.eu/legal-content/en/txt/?uri-celex:52017XC0705(01) • Transposed to local laws before end 2016. EFFAS • Compulsory for PIE's. 500 employees. EFFAS KPI's • • Founded in 2007 Partnered with EU commission supported laboratory" Corporate Responsibility and Market Valuation of Financial and Non Financial Performance" GRI Global reporting initiatives standards • • Materiality focus Aligned with EU Directive and IIRC Local impacts SASB Sustainability Accounting Standards Board ESG indicators to include in the 10K and 20F forums. IIRC TCFD KPMG Integrated Reporting framework Different focus of information: future, not past. Strategic, and quality of governance and Management. Task Force on Climate related Financial Disclosures Different focus of information: future, not past. Strategic, and quality of governance and Management. © 2020 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 31#32In A Nutshell... WHAT? Taxonomy Disclosures A list of economic activities that are considered environmentally sustainable for investment purposes. New harmonised disclosure requirements applicable to financial market participants, financial advisors and financial products. WHY? Enables informed decision-making Ensures consistency Accountability Not green vs. brown → Transitioning polluting sectors → Strengthening the transparency of companies on their environmental, social and governance (ESG) policies → Introducing measures to clarify asset managers' and institutional investors' duties regarding sustainability শ HOW? KPMG Applies to all financial products regardless of whether they are marketed as "green" or not Contribute substantially to at least one of the six environmental objectives "Do no significant harm" to any of the other Managers whose financial products target "sustainable investments" will have to disclose information about these in pre-contractual disclosures, as well as on their websites and in periodical reports. → MiFID II & IDD delegated acts → Investment advisers will have to assess sustainability preferences of clients → Institutions - TCFD, impact reporting © 2020 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 32 32#33In summary-who is impacted? Proposed Reform Amendments to the AIFMD and UCITS Regimes Organisational Requirements for Investment Firms Disclosure Requirements Product Governance Suitability • Application to EU Managers Direct Impact on EU AIFMS and UCITS ManCos Direct impact on: EU AIFMS with top-up permissions; any EU investment firms in the group Direct impact on: EU AIFMs; UCITS ManCos; any investment firms in the group with authorisation to provide portfolio management services Indirect impact where fund shares are distributed to EU investors Indirect impact where fund shares are distributed to EU investors Direct impact on: • EU AIFMS with top-up permissions; any investment firms in the group with investment advice or portfolio management permissions Application to Non-EU Managers with EU Sub- Manger Indirect impact on non-EU managers acting as sub-managers to UCITS ManCos No direct impact on other non-EU managers No direct impact on non-EU manager Direct impact on EU sub-manager to non-EU manager Direct impact on: non-EU managers marketing funds to EEA investors EU sub-managers to non-EU managers Indirect impact on non-EU managers that act as sub- managers to UCITS ManCos Indirect impact where fund shares are distributed to EU investors Indirect impact where fund shares are distributed to EU investors Application to Non-EU Managers with no EU Sub-Manager Indirect impact on non-EU managers that act as sub- managers to UCITS ManCos No direct impact on other non- EU managers No direct impact on non-EU managers Direct impact on non-EU managers marketing funds to EEA investors Indirect impact on non-EU managers that act as sub- managers to UCITS ManCos Indirect impact where fund shares are distributed to EU investors Indirect impact where fund shares are distributed to EU investors KPMG © 2020 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 33 33#34Timeline of Key Dates - Summary Timing Key Developments KPMG • . April - December 2020 Benchmark Regulation - Benchmark administrators to update benchmark statements regarding ESG factors (April 30th) Disclosures Regulation ESAs to prepare draft technical standards on disclosures to investors in relation to adverse impacts on the climate and other environment- related adverse impacts (December 30th) March- June 2021 ⚫ Benchmark Regulation -Application date of most provisions (pre- contractual and website requirements) of the Disclosure Regulation (March 10th) Taxonomy Regulation -Financial market participants with more than 500 employees or which are parent undertakings of large groups with more than 500 employees must publish and maintain on their websites a statement of their due diligence processes with respect to the principal adverse impacts of investments decisions on sustainability factors. (June 30th) December 2021- January 2022 June - December 2022 January 2023 Disclosures Regulation ESAs to prepare draft technical standards on disclosures to investors in relation to adverse impacts in the field of social and employee matters, respect for human rights, anti- corruption and anti- bribery. (December 30th) Taxonomy Regulation - Application date in respect of activities that substantially contribute to climate change mitigation and adaptation. (January 1st) Disclosures Regulation - Application date of requirements relating to periodic reports of ESG-focused products. (January 1st) Taxonomy Regulation -ESAS to prepare draft technical standards on activities that substantially contribute to environmental objectives other than climate change mitigation and adaptation (water, circular economy, pollution, biodiversity). (June 1st) Disclosures Regulation - Where the manager considers principal adverse impacts of investment decisions on sustainability factors, prospectus to disclose whether, and if so how, each financial product considers principal adverse impacts on sustainability factors. (December 30th) Taxonomy Regulation - Application date in respect of activities that substantially contribute to environmental objectives other than climate change mitigation and adaptation. (January 1st) © 2020 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 34 =4#35Climate risk#36Setting the scene • • . . ·Climate-related risks are front and centre at policy level as well as consumer level • Broad range by their nature and they affect all elements of an economy, reaching across all sectors and across all geographies High degree of certainty that these risks will materialise over the coming century. • Impact for corporates. . mismatch between traditional financial planning and climate change time horizons •Impact for insurers... both from an underwriting and investment perspective In essence, climate change is a potential source of risk to financial stability World Economic Forum - Global Risk Report 2020 Top 5 Global risks in terms of Impact Top 5 Global risks in terms of likelihood 2010 2020 Asset price Extreme collapse weather China economic Climate action failure slowdown Chronic disease Natural disasters Fiscal crisis Biodiversity loss Human made Global governance gaps 2010 Asset price collapse Deglobalisation Oil price spikes natural disasters 2020 Climate action failure Weapons of mass destruction Biodiversity loss Chronic disease Extreme weather Fiscal crisis Water crisis Economic Environment Societal Geopolitical Technological KPMG © 2020 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 36#37What are climate-related risks Climate-related Risks . - Chronic: Changing weather patterns, rising mean temperature and sea levels • Risks generally form into two broad categories Physical & Transitional Physical - Acute: Extreme weather events • Physical: acute (short term) hurricanes and floods & chronic (longer term) event, rising global temperatures & sea levels • • Transitional: risks related to the transition to a lower-carbon economy, such as increased regulation, substitute products, newer technologies and reputation. Physical risks (where climate change affects property, industry, infrastructure and health) could be very severe, especially if warming exceeds 3°C. A transition to a low-carbon economy will require adjustments by all aspects of society ... consumers, businesses and policymakers wide range of potential outcomes relating to the timing and extent of future warming Transition Policy and Legal - Carbon pricing and reporting obligations ― Regulation of high carbon products and services - Mandates on and regulation of existing products and services ― Exposure to litigation Technology - Substitution of existing products and services with lower emissions options - Costs to transition to lower emissions technology Markets ― Changing customer behavior/demands -Increased cost of raw materials Reputation -Shift in consumer preferences -Stigmatisation of high carbon sectors -Increased stakeholder concern/negative feedback KPMG © 2020 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 37 37#38Where are we now? . . • Research suggests probable warming of 1-6 C above preindustrial levels by the end of the century, depending on the success of mitigating actions. Wide range of potential outcomes relating to the timing and extent of future warming Potentially huge consequences under scenarios at the upper end of the range. -2 Gt 0 -1 2 1 3 1900 1910 1920 1930 1940 1950 1960 KPMG Global financial crisis COVID-19 Global temperature change relative to 1850-1900 (°C) חל10 1970 1980 1990 2000 2010 2020 2.00 1.75 Current warming rate 1.50- 1.25 2017- 1.00 Human-induced warming 0.75 Climate uncertainty for 1.5°C pathway 0.50 0.25 Observed warming 0.00+ 1960 1980 2000 2020 2040 2060 2080 2100 • Restricting the extent of warming will require a massive and prolonged transition effort, unprecedented in scale and duration, which may be orderly or disorderly. © 2020 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 38 Chart Sources: IEA and IPPC#39How climate risks and opportunities impact the business model • • The mechanisms through which climate risks and opportunities impact the business model can be diverse Identifying the key risks and opportunities and using scenario-analysis to assess the likelihood and severity of the impact of these risks and opportunities builds climate resilience Potential impacts include ... Physical risks Transitional risks Acute Chronic TCFD Risks and Opportunities Policy and legal Technology Market Reputation Risks Opportunities Strategic Planning Risk Management Financial impact In climate scenarios Resource efficiency Energy source Products & Services Markets Resilience production/operation disruptions, supply chain disruptions, Revenues Expenditures Income Statement Cash Flow Statement Balance Sheet Assets & Liabilities Capital & Financing physical damage to assets and raising insurance costs $ changes in resource / input prices changes in demand for products and price fluctuations changes in hedge investment positions KPMG © 2020 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 39#40Role of insurers-climate risk is not just for corporates Insurers have a unique role in the global effort to mitigate and adapt to climate change: ✓ Providers of risk protection ✓ Major investors managing c.$30 trillion of assets Are new approaches to risk protection require? • History is no longer a reliable guide to pricing risk ... 1-in-100 event in the 1960s is now a 1-50 year event ... could be even more frequent in the future Insurers drop almost 350,000 California homeowners in high- fire risk areas • Potential for risk mispricing arises Consider, a top Physical Risk ... the risk of flooding • Impacts people's homes and businesses, with devastating impacts on communities • Not just emotional distress associated with damage and loss, there are also financial costs . • Underinsured to flood risk, flood events can cause losses for homeowners • Reduces ability to repay loans ... damaging the value of the property • Quality of the loan portfolios of banks/insurers 136,000 homes destroyed 15m total housing stock; only 15% insured for flaoding KPMG © 2020 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 40#41What tools are available? The Principles of Sustainable Insurance (PSI) Principle 1: "We will embed in our decision-making ESG issues relevant to our insurance business". • ESG risks and exposure across differing sectors Risk mitigation and good practices • Reporting, standards, industry benchmarking TCFD • FSB driven, voluntary but potentially moving into regulatory setting . . Strong focus on governance, risk (& opportunities) and reporting on metrics New approaches ... KPMG - Dynamic Risk Assessment (DRA) KPMG June 2020 Si ESG Guide for FINANCE INITIATIVE UNEP PSI Princes for Sustainabl Insurance Von10 Allianz Managing environmental social and governance risks in non-life insurance business The first ESG guide for the globa Insurance industry developed by UN Environment Programme's Principles for Sustainable Insurance Initiative D UN environment programme PS Pest me Tel units f Cancel of Un En gramms Un Ch Unwrapping the risks of plastic pollution to the insurance industry The first global insurance industry study on managing the risks associated with plastic pollution, marine plastic litter and microplastics TCFD Knowledge Hub Find the resources you need to understand and implement the TCFD recommendations New to TCFD Learn more about t ecommendatene and noons eene apperne Core Elements of Recomm Governance woon. Strategy me CDP DISCLOSURE INSIGHT ACTION © 2020 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. Mumb 201 MSCI D 41#42Dynamic Risk Assessment What is DRA? Dynamic Risk Assessment (DRA) is an evolution in risk assessment. It considers the traditional measures of risk severity and likelihood - but also considers risk interconnectedness (risks that link together) and velocity (expected speed with which risks will affect operations). The DRA process uses the scientific consensus methodology of expert elicitation to collect the data for analysis, and network theory to connect the organization's risks in a three-dimensional space Potential impact Traditional, two dimensional risk map High Low This individually insignificant risk has hidden systemic significance: it triggers many other risks into existence, all of them more significant than itself Likelihood of occurrence Inter-connected view Likelihood and severity of this cluster exceeds those of this single risk High Connectivity strength: low medium high Likelihood The individually most significant risk exhibits low levels of expected contagion Severity Key features: An evolution in risk assessment Relies on expert elicitation, and advanced data analytics in order to identify, connect and visualize risk in four dimensions Considers the contagion effects of individual risks, and the potential speed with which risks will affect operations Identifies the most acute systemic risks for a business Identifies the systemically most significant risk Provides visibility over how 'structural breaks' (macroeconomic, sociopolitical and other megatrends not necessarily previously observed) impact organization's risk profile Helps to inform clients' forward-looking strategic direction Can inform control design for the prevention, detection and remediation of the risks Informs risk mitigation and response plans in relation to systemic risk Can help increase business resilience and turn risk into opportunity KPMG © 2020 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 42 42#43DRA and ESG Client story - World Business Council for Sustainable Development "However, ESG-related risks can be difficult to identify, quantify and prioritize. It requires a deep understanding of the business operating environment and leadership that acknowledges and accepts the evolving external landscape. On a technical level, the process must move beyond traditional impact versus likelihood analysis to consider the interconnectivity and speed of onset of these risks." "Because of these challenges, the World Business Council for Sustainable Development (WBCSD) engaged KPMG, through its process known as Dynamic Risk Assessment." An enhanced assessment of risks impacting the Food & Agriculture sector An enhanced assessment of risks impacting the food and agriculture sector Share in S wbcsd Published: 22 Jan 2020 Type: Publication The current risk landscape for business has changed as all of the top five risks identified for likelihood were environmental according to the World Economic Forum Global Risk Report in 2020. In addition, the complexities and connectivity of environmental, social and governance (ESG)-related risks mean companies must assess risks not just individually, but as an interconnected and aggregated group. This report on the food and agriculture sector is intended to help companies more effectively assess their exposure to food system challenges and to integrate this knowledge into target setting and solution building. It presents analyses from the application of an enhanced risk assessment technique - KPMG's Dynamic Risk Assessment methodology - to the risk landscape represented by the perspectives of nine leading companies operating in the food and agricultural sector. This report dives into how a dynamic risk assessment can improve companies' risk practices and identify crucial aspects to continue creating long-term value. This report is a continuation of WBCSD's risk work and the guidance built in collaboration with COSO on Applying Enterprise Risk Management to Environmental, Social and Governance-related Risks. Download the report Figure 6: A network view of the risks identified including relative impact and connectivity Relative impact- Lack of accord on, industry goals Threshold for connection: 5% of maximumweight, or 1 agreement Number of respondents: 19 Biodiversity and genetic- concentration "It presents analyses from the application of an enhanced risk assessment technique - KPMG's Dynamic Risk Assessment methodology - to the risk landscape represented by the perspectives of nine leading companies operating in the food and agricultural sector. This report dives into how a dynamic risk assessment can improve companies' risk practices and identify crucial aspects to continue creating long-term value." KPMG Extreme weather events Ineffective industry governance Nitrogen inefficiency Disparate approaches adopted by producers, Land degradation research and scientists 250 Water Inefficient production practices Technology/biotechnology Aging farmers Understanding agricultural practices Geopolitics Regulation Expanded supply chain governance Macroeconomic Social media Food safety Low/Nill High Distribution channels Changing consumer trends https://www.wbcsd.org/Programs/Redefining-Value/Business-Decision-Making/Enterprise-Risk-Management/Resources/An-enhanced-assessment-of-risks-impacting-the-Food- Agriculture-sector © 2020 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 43#44DRA and climate change strategy Client story - City of Sydney KPMG Dynamic Risk Assessment helps the City of Sydney develop its climate change strategy. The City of Sydney in New South Wales, Australia needed to understand how climate change is likely to affect the city in 2030 in order to develop an effective Climate Adaptation Plan. KPMG in Australia performed a DRA to understand the interdependencies between 32 different climate change risks faced by the city. KPMG analysts used expert elicitation to develop a graphic representation of the relationships between the risks and perceptions of severity. Their analysis also identified trigger risks which were central to causing other risks, and those that are most centrally affected by other risks. Clusters of risks that were likely to occur together were also identified, so that these could be managed together. As a result of the DRA, the Sydney City Council benefited from greatly improved insight into the risks that climate change posed to the city and was in a better position to develop actions to address these. The thickness of the connecting lines in the diagram illustrates the strength of the connections between the individual risks. Bushfire/cascading impacts Strain on heat refuges Structural degradation Community health impacts City wide power disruption Inundation foreshore transport/ pedestrian routes Safe sea transport Heat wave behavior-related risks Changed human behavior Energy system strain Inundation property/ infrastructure Airport delays Heat island effects Insurance affordability Reduced physical activity Displacement Property / infrastructure damage Localized power infrastructure damage Workforce productivity Transport disruption Inundation foreshore icons Air pollution Traffic congestion Overflow of Sea level rise-related risks Reduced appeal outdoor events Food security Reduced amenity Pests and disease Flash flooding contaminates Intense rainfall-related risks Communication disruption Changed biodiversity Graphic adapted from: RPS (2015) City of Sydney Climate Risk and Adaptation: Project Report. Available from: https://meetings.cityofsydney.nsw.gov.au/Data/Environment%20Committee/201512071401/Agenda/151207 EC ITE M03 ATTACHMENTD.pdf KPMG © 2020 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 44#45Resources • Relevant ESG materials are available to download from www.kpmg.ie/esq Follow Conor Holland & Shane O' Reilly on LinkedIN to keep up with latest KPMG publications and insight on sustainable finance and asset management trends. Niall Naughton, Brian Morrisey for KPMG Insurance updates. Our latest (May 2020) 'Frontiers in Finance - purpose or profit?' publication explores the rapidly growing ESG agenda in the financial services sector by looking at the opportunities and growth areas, the global efforts in transitioning to an ESG-aware financial system; the growing demand for standardised measurement and disclosure; and the evolving political and regulatory landscape related to ESG. Visit: https://home.kpmg/xx/en/home/industries/financial-services/frontiers-in- finance.html ⚫ For KPMG Ireland's overview of the current regulatorylandscape in EU Sustainable Finance, visit: https://home.kpmg/xx/en/home/industries/financial-services/frontiers-in-finance.html Sustainable Finance An overview of the current regulatory landscape KPMG © 2020 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 45 45#46Thank you OGA