E&S Advisory and Risk Management Services

This development has been catalysed by industry trends such as the EDFI Harmonisation Initiative, where investment flows are aligned with the Sustainable Development Goals and, more recently, with the Paris Climate Agreement. Further, the European Commission has developed a specific EU taxonomy for sustainable activities, which has the ability to not only trigger reporting and potentially accounting, but ultimately prompt funding considerations on the European financial markets as well as for any European investor for transactions abroad.

Our Approach

Still, there remain challenges for investors when integrating ESG considerations into their decision-making process. First, some still question if considering ESG issues actually adds value to their investment process or might even hurt yields. Even though several recent studies have shown that ESG integration can limit volatility and enhance returns, investment professionals often place a greater weight on their own experience than on third-party research - and their own experience is often still dominated by traditional investment paradigms that were established before ESG factors became an issue.

Another problem ESG investors face is the lack of high-quality data that can guide their investment decision process. Without access to data sets, modelling capabilities, and valuation techniques, it is not always straightforward to understand the effects of ESG risks and opportunities when planning an investment in a company. The good news is, that there has been a recent surge in specialized data providers for ESG investors. In comparison to market suppliers, these firms concentrate only on ESG research, evaluations, and analysis. Arabesque, Covalence, CSRHub, Ethos, Inrate, Sustainalytics, and Goby are just a few companies that offer comprehensive ESG data services. Each of these firms has its own technique of assessing ESG aspects, grading methodology, and risk analysis tools.

Finally, greenwashing is a growing challenge to the ESG investment industry. This term originally described misleading claims about environmental practices, performance, or product, but has been used more widely to incorporate ESG factors more broadly. In recent years, there have been serious questions why certain stocks are part of the top holdings of ESG funds even though these companies were involved in significant controversies or undertook controversial activities. This has been a major blow to the credibility of ESG investing. The good news is that certain regulators like the EU have recently launched various initiatives to standardize claims around the green and ESG credential of funds and indices, which will contribute to a clampdown on greenwashing.

Not withstanding these challenges, there is a widespread perception that ESG investing is likely to become the market standard within the next five years. At that point, a differentiation between “mainstream investing” and “ESG investing” will most likely no longer make sense as they will have merged into one concept. Most available research today indicates that this will be good news for investors as their long-term yields will increase while volatility will be tamed.

For our work in emerging markets, this implies several changes. First, more effort should be put in projects combating climate change, the mobilization of funds for that as well as the need for investors to ensure their money is well spent. Next, development of more regulation in emerging markets when it comes to ESG will in turn provide higher incentives to proactively engage in those markets. The incorporation of climate-related as well as technology-related questions into governance will become instrumental in addressing ESG issues along the investment process. Finally, advancement of technology that can be used to improve and support ESG reporting, grievance mechanisms, and risk management will take a front row in many assignments.

Over the past years of its operations, LFS has built up substantial track record in the field of E&S Advisory, Risk Management and the Development of E&S Management Systems for Social Enterprises, Financial Institutions and Investors. The knowledge gained and tools developed through our extensive project work enable us to provide a comprehensive array of services to clients for systematically improving their E&S performance in order to ensure compliance with their double-or triple-line business model. LFS is familiar with the most recent E&S requirements and approaches of leading international development finance institutions and development agencies.

Partners

To leverage our in-house expertise in the field of E&S advisory, LFS can benefit from a strong worldwide partner network that includes both s reputable regional consultancy firms in Latin America, Africa and Asia and a large network of individual experts of that field around the globe.

Typical ESMS Development Assignment

An increasing number of donors and investors expects investees to have a fully fledged Environmental and Social Management Systems (ESMS) in order to ensure an efficient mitigation of all E&S risks a company or financial institution faces. In the past, LFS has designed such ESMS for both Fintech and Agrotech Firms as well as for Financial Institutions in Developing countries. A typical ESMS development assignment commonly incurs five phases:

• Phase 1: Kick-Off and initial site-visit and stocktaking
• Phase 2: Development of ESMS Procedures & Tools
• Phase 3: ESMS Training
• Phase 4: ESMS implementation
• Phase 5: ESMS Evaluation

The activities in each of the phases include the following: