29 Jul 2020

Our society, economy and politics are facing unprecedented challenges. The reason: a virus called Corona. At the same time, it is accelerating a change towards more digitalisation and sustainability. How the Corona virus challenges companies and how WeSustain can support them by providing new solutions.

by Marie-Lucie Linde

Covid-19, Sars-CoV-2 or Corona. Three terms that refer to one and the same virus that has thrown the world community into an exceptional and unprecedented situation since this spring. From the tragic loss of human lives, social distancing and the wearing of masks in public to the shutdown of entire economic sectors (car industry, tourism, etc.), the virus has turned our society and economy upside down and changed it irrevocably. In view of the high loss of human lives caused by Corona, it is almost presumptuous that one would want to take something positive out of the crisis. But it is human to look for something positive in crisis in order to accept the suffering and all the changes. And so, many entrepreneurs ask themselves: What changes or developments do I want to positively carry forward in the future for my company from this crisis? What new challenges has Corona brought to my company? This special is also intended to show which of these new challenges can be met by companies using WeSustain solutions?

From the existential crisis, to standing machines, up to ghost offices

Every company is affected and challenged by Corona in one form or another. Reports about large corporations (e.g. Lufthansa) and entire industries (restauration and tourism), which fear for their existence, are accumulating. Bankruptcies and insolvencies become a mass phenomenon. Only through the emergency aid packages that politicians have put together in short-term, the economic collapse is avoided, at both national and European level. But even today, in some companies, both operations and machinery are at a standstill, despite easing measures.

Companies that were able to keep their operations going during the crisis, for their part, are looking into ghost offices. Only occasionally do employees return from their home offices – wherever possible – to their offices. Empty desks, quiet corridors and small meetings with distance regulations or video conferences characterise the image of offices and everyday business life. But the Corona virus has not only changed everyday business life, it has also brought about completely new operational challenges: from a different form of collaboration, increasing digitisation, new requirements for supply chain, compliance and risk management – i.e. extended operator responsibilities – to new financial communication challenges for companies. While WeSustain, as a software provider for responsible business management, is also challenged by Corona, the exchange with customers has intensified in these special times. Because all of them are looking for solutions to master the new and operational challenges.

Digital and analogue: See? There you go!

In theory, in the age of digitisation, every company should have gotten used to analogue and digital collaboration. In practice, until recently the opposite was still a living reality: the possibility of working from home offices or meeting with customers or partners via teleconferencing was either avoided or scarcely available in many companies up until 2020. The assumption that home office employees were actually productive was simply too small. And even business trips to customers or partners became a must, if not a status symbol for personal or business success.

Corona has now proven that digital collaboration in companies works perfectly from a home office. Entire workforces were sent home because of the risk of infection and equipped with the appropriate hardware and software. Ignoring the loss of liquidity caused by a collapsed order situation or the domestic challenge of childcare, non-producing companies in particular were able to continue working as before. So even WeSustain as a software developer without a physical production is challenged by the new situation, WeSustain is still able to work effectively. Crucial factor for this: From the very beginning WeSustain has been focusing on digital work processes and decentralized structures for teamwork and can therefore – even in times of Corona – keep up business and software development from the home office.

The lawmakers have made their necessary contribution to accelerate this change in working together: For example, management boards, supervisory boards or shareholders’ meetings may now take place online and will continue to do so in the future. This is a change and a new mindset on effective collaboration in companies that will shape the working world of today and tomorrow: Instead of mistrust and control, trust and ownership will gain acceptance in corporate culture. Definitely a positive effect of the crisis.

The sleeping giant has finally woken up

The Corona crisis is having another effect: it has given an immense boost to digitisation in companies and made what was previously thought impossible possible in a very short time. All of a sudden, companies and administrations have extensively digitized their work processes, because if they didn’t, they would no longer be able to operate. Here are a few examples from industries that are now implementing digital solutions that were previously much discussed and in some cases criticized:

  • the healthcare sector, which is making use of telemedicine and digital consultation hours
  • universities, which are transforming entire university curricula into online lectures
  • the real estate industry, which uses online viewings and digital tools to match property and tenants/buyers1
  • politics with perhaps the most prominent example in form of the Corona App

The crisis has resolved perceived obstacles to more digitalisation in companies and thus paved the way for change. At the same time, it has shown and made transparent where the German economy has failed to take action in terms of digitisation. Germany has an acute need to catch up, especially in the area of IT security, as the incident in North Rhine-Westphalia in connection with the allocation of emergency aid funds has shown. ” At present it can be seen that those who were already very far along in digitisation were least restricted by Corona and quickly found their way into a new way of working. No matter whether home office, digital schools or digital administrations: Wherever the digital transformation was already far advanced, one could seamlessly enter a new mode. Digital companies, such as online retailers, currently have the least problems,” emphasizes Christopher Meinecke, a known digitisation expert and head of the “Digital Transformation” department at the German Association for Information Science, Telecommunications and New Media. (Bitkom) in Berlin. Manfred Heil, CEO at WeSustain, agrees: “Not only since Corona we know that a professionalisation of operational processes is mainly digital and collaborative. This applies to sustainability, ESG, compliance and audit management as well as to all other corporate areas. That’s why we develop software solutions that establish digital structures in companies and offer employees a collaborative platform to work on joint projects”.

Some other leading experts, just as before Meinecke, see the danger that this development towards more digitisation could remain a one-time effect and that the willingness to invest in consistent digitisation could be weakened by the costs of the crisis. They therefore call for the new momentum in digitisation activities to be consistently carried into the future.2

Glocalisation as a new principle 

In addition to digital experts, leading futurologists are looking above all at global value chains and the supply chain management of companies. Again, the “Corona” magnifying glass reveals a weak point: Global supply chains are fragile and carry the risk of collapse in case of supply bottlenecks or complete delivery failures. The call for “glocalisation” – i.e. globalisation with stronger local and regional components – is therefore becoming louder and louder. The aim for European countries, for example, should be to manufacture and stock their products primarily within the EU in order to shorten transport distances and save emissions on the one hand and reduce their dependency on entirely globally organized and outsourced supply chains on the other. Again, digitisation and new technologies as well as software solutions play a special role: “Supply chain management in particular is complex and brings with it particular challenges in terms of consistent data and its transparency. With the help of our WeSustain software, we support companies in systematically identifying and managing sustainability risks along the supply chain, which have now become increasingly important due to the crisis,” says Manfred Heil.

Corona therefore reinforces the call for a digital transformation in order to connect decentralized and local processes with global processes in a way that creates meaning and value. One example of how this can be achieved is additive manufacturing, which already today makes digital development but local production of products possible. However, not only digitisation but also the promotion of circular economy plays a central role in the context of “glocalisation”. Only if resources are reintroduced into the value chain in a closed-loop system, companies will be able to emancipate themselves from global supply chains in the future.1

New territory: non-financial risks and extended operator responsibilities

In times of the corona pandemic, risk and compliance managers in companies are once again called upon. They are the ones who are currently performing numerous additional tasks (e.g. business continuity management or publishing ad hoc reports) and making a vital contribution to limiting the damage to companies. In this context, Corona has above all identified new risks which only allow for a limited use of proven control instruments. This is because they are mainly caused by “non-financial risks”. Examples for this kind of risks are reputational risks, IT system failures (cybercrime) and IT security risks or sustainability and/or ESG risks. Risk and compliance management in times of Corona is therefore new territory for many.2

In addition to securing the financial existence, especially the compliance departments of companies are currently busy ensuring complete legal conformity with new country-specific and authority measures – especially with regard to the Infection Protection Act. After all, these measures entail a number of sanctioning risks: for example, the risk of paying horrendous fines if the company violates the order to close the operating site, to name just one example. The particular challenge lies above all in keeping oneself constantly informed about the rapidly changing administrative regulations –some of which are issued in urgent proceedings – and in implementing them adequately in order to guarantee legal compliance for the company.3 A reliable software solution such as WeSustain’s “Enterprise Compliance Management” (ECM) solution can be a valuable support in this context. Among other things, relevant legal cadasters are always updated and users are immediately informed about the update so that compliance managers can respond quickly and legally compliant.

Experts agree that the professional handling of the Corona pandemic lies within the operator responsibilities of companies. After all, it no longer only includes the responsible operating of technical systems and the legally compliant operation of buildings, but also the employer’s duty of care for their employees in the form of health and safety measures (keyword: HSE or EHS). However, it is still being discussed what the outsourcing of responsibilities away from the private individual (employee) to a private enterprise level (company) means for operator responsibilities and legal compliance outside such exceptional events such as the corona pandemic.4

Sustainability paves its way into investor relations

The Corona crisis has also given a boost to corporate financial communication, especially with regard to sustainability. Even though the topic of “Green Finance” or “Sustainable Finance” is still new territory for many investor relations departments, it is now right at the top of the agenda due to upcoming regulations, but also due to the corona crisis. The call on the capital market is becoming louder and louder to bring the sustainability department, which is primarily responsible for the management and communication of non-financial aspects (ESG) of the company, closer to the investor relations department. In the future, digital data management and reporting processes, such as the ESG solution or the “Enterprise Sustainability Management” (ESM) solution from WeSustain, will become vital for these departments: “We are working closely with stakeholders from the financial market, who give us concrete indications as to which new challenges for financial communication digitized processes can simplify,” reports Dr. Manfred Heil from WeSustain.

Last but not least, the financial recovery packages at both national and European level have established the importance of sustainable transformation. The rebuilding of Europe after Corona – among other measures through the “Green Deal” – is a historic opportunity for many to push climate protection and consistently reduce investments in “dirty” investments. This time, the central concern shall be to direct the money to a large extent not again, as after the financial crisis in 2008, to climate-damaging sectors, but above all towards the decarbonisation of the economy. This will give companies that focus on sustainable business strategies and integrated and transparent non-financial reporting through their investor relations a clear competitive advantage in the market of the future.

And what is left in the end?

The Corona crisis changed a world of things: People, whole societies, but also politics and economies. The way we interact with each other in our private lives as well as in our professional lives has changed. The exceptional and unprecedented situation triggered by a virus has clearly accelerated processes of change towards more digitisation and sustainability, and has made the previously impossible possible. But whether companies will carry these changes or developments forward into the future has to be seen and depends on the solutions they have at their disposal. “We are convinced that if companies now combine digitisation and sustainability initiatives, e.g. through our IT platforms, the reciprocal effect between digitisation and sustainability can be made efficient and meaningful,” says WeSustain CEO, Manfred Heil. The hope therefore prevails that even after the acute pandemic, companies will continue to proactively shape the “new normal” in the sense of a sustainable and digital transformation. The global community now has the once unique opportunity to choose a new path.

sources “A virus with big impact”:
1 cf. WELT AM SONNTAG: “Plötzlich schafft Deutschland, was bisher unmöglich schien” LINK, accessed on 05.07.2020.
3 cf. WELT AM SONNTAG: “Plötzlich schafft Deutschland, was bisher unmöglich schien” LINK, accessed on 05.07.2020.
4 cf. LOGISTIK Express: “‘Glokalisierung’ als Antwort auf Corona” LINK, accessed on 05.07.2020.
5 cf. Haufe: “Risikomanagement und Coronavirus – worauf es jetzt ankommt” LINK, accessed on 07.07.2020.
6 cf. Haufe: “Neue Compliance-Risiken für Unternehmen in Zeiten der Corona-Pandemie.” LINK, accessed on 09.07.2020.
7 cf. Weka Akademie: “Hat Corona etwas mit Betreiberverantwortung zu tun?” LINK, accessed on 09.07.2020.
25 Mar 2020

Private markets: A decade with a new imperative

Private markets are moving from a prosperous decade into a decade of change. Strategies that have been successful so far must be reviewed for sustainability risks and thus for their licence-to-operate. Read our trend report to find out which trends (e.g. ESG) will shape private markets in the new decade.

by Marie-Lucie Linde

Private markets can look back on a decade of prosperity and steady growth. In recent years, however, developments have emerged that announce a new decade of change and bring leading players in the private markets to the question: How can a new growth formula look like in times of climate change and global sustainability goals (in short: SDGs)?

Considering that about 5 years ago, very few Limited Partners (LPs) and General Partners (GPs) were acting in the sense of impact investing and according to ESG criteria, the developments of the last few years are all more impressive. After all, more and more LPs and GPs are taking care that capital is invested for greater impact. And the market proves them right: Impact-oriented investments have proven to be an attractive investment opportunity with an appealing risk-return profile. As a result, the pressure to focus more on alternative investments is steadily increasing. And so a decade of new trends, which entail changed requirements and new opportunities, is looming on the private markets.

A new era for Private Markets

Looking at the private markets – i.e. investments such as private equity, private debt, infrastructure and real estate projects – five trends in particular are becoming increasingly important:

Trend 1: Climate change and climate scenarios as part of risk management
Climate change is not a passing fad, but a serious reality affecting society and economy. For the global economy, the effects of climate change have become one of the greatest threats – and not just since fridays-for-future. For this reason, the Task Force on Climate-related Financial Disclosures (TCFD) of the G20 Financial Stability Council has already published recommendations for standardised climate reporting in 2017. Investors and companies should thus be able to quantify the financial impact of climate change on their business model and strengthen their resilience. The Sustainable Finance Advisory Board has just recently even published a proposal for a climate label that foresees a “mandatory product classification” in terms of climate impact for all financial products. The current ESG reporting, in which the two topics “climate change” and “emissions” are the most important aspects, also reinforces the importance of climate risks. Consequently, climate scenarios are moving to the top of the agenda of private market participants’ risk management.

Trend 2: Sustainable Finance and ESG as the imperative of the hour
The financial market plays a central role in guiding the real economy into a sustainable and decarbonised transformation. European decision-makers, among others, have recognised this fact and with the EU action plan “Financing Sustainable Growth” or “Sustainable Finance” have developed a framework or path for Responsible Investing. With the action plan, financial approaches and instruments such as the Transparency and Taxonomy Directive are meant to promote a sustainable and resource-efficient economy. Indeed, financial actors (e.g. insurance companies and banks) already have to report according to TCFD. However, “sustainable finance” has become an established trend internationally as well and generally refers to the inclusion of environmental, social and corporate governance aspects in the decisions of financial actors. As a result, public interest and pressure from LPs – especially institutional investors – to take environmental, social and governance (ESG) factors into account when making investments has increased significantly. ESG is becoming the imperative in private markets, not only since studies have confirmed that the inclusion of ESG criteria has a positive impact on investment performance. And yet, private markets are only at the beginning in terms of the material incorporation of ESG factors into investment and portfolio management processes as well as the development of new products that target ESG-driven demands.1

Trend 3: Impact instead of profit maximisation as the guiding principle
In the last 5 years – in times of low interest rates – more and more investors are following sensitively where their money is going and put sustainability more clearly in the focus of their investment decisions. Under the term “Impact Investing”, investors put their money into very specific industries, assets and projects that they hope will have a positive impact on society and/or develop solutions for socio-ecological problems. For example, there are so-called impact investment funds, where private, impact-oriented and state investors join forces across sectors. The aim of impact investing is to make the impact measurable and to link it to the return and repayment of the investment.

Trend 4: The new concept of inclusive growth
Many international economic experts, including Prof. Dr. André Reichel, expect growth rates of less than one percent by 2050. This means that a new way of thinking is needed: Those who want to be successful must emancipate themselves from the classic growth paradigm and focus on inclusive growth, which strengthens the economic and social inclusion of people in political economic measures. This also applies to the financial market and, within it, to private markets, which are equally faced with the challenge of translating externalised costs into a new growth formula. At IPEM 2020, the largest trade exhibition for private markets in Europe, it came as no surprise that this year’s motto was “Shaping a new growth formula”. Private markets are obviously looking for a new growth formula in terms of sustainability.

Trend 5: The financial sector facing changes in the digital age

Digitisation does not leave the financial system unaffected. On the contrary: the financial sector is in the midst of digital transformation. Many private market companies are therefore thinking about how they can digitise their investment processes. The largest GPs have taken the lead in the market, especially in the real estate sector, where investors have access to larger and more accurate data sets. In addition, the number of technology-oriented private market firms has grown rapidly in recent years.2 At the same time, digitisation is creating more and more crowd and community-based financing opportunities, i.e. private equity through community. This includes, for example, so-called crowdfunding platforms, where projects are financed by small amounts of money from people of equal interest. The crowd and everyone in it thus becomes an “investor”.3

Digression: Clearing up the myths about sustainable finance

The more often we deal with “sustainable finance”, the more often we face allegations that appear as being true in the market. These statements often turn out to be myths that can be proven wrong by simple facts. At this point, we would like to clear up the five most common myths about sustainable finance:

Myth Truth
1. Sustainable investments/assets underperform compared to conventional ones. 90% of current studies show that assets with a pronounced ESG profile perform just as well, if not better (good risk/return profile).
2. Sustainable investing consists only in sorting out “sinful” investments. Investment managers increasingly incorporate positive aspects of sustainability by integrating ESG factors into the investment process.
3. Sustainable investing is a passing fad. Sustainable investing has been around for decades and is becoming increasingly important, not least due to increasing regulations.
4. Interest in sustainable investments is usually limited to millennials and women. There is a broad interest in sustainable investment strategies, with institutional investors leading the way.
5. Sustainable investing only works for stocks. Sustainable strategies are offered across all asset classes.

You can find a visually appealing presentation including the detailed facts under Visual Capitalist who carried out the myth check.

Regulations on the rise: EU action plan & Co.

As indicated in trend 2 “Sustainable Finance and ESG as the imperative of the hour”, the density of regulation for financial markets is increasing, which will have an impact on private markets that have only been regulated to a limited extent up to now. The aim is to create orientation and clarity as well as frameworks for the implementation of sustainable finance. Private market participants should be aware of the following legal developments:

  • EU action plan “Financing Sustainable Growth”
    The EU action plan “Financing Sustainable Growth” contains two EU regulatory measures which are to come into force by 2021 at the latest:
    • The EU Transparency Directive is supposed to come into force in March 2021 and stipulates that financial market players have to report on how they deal with sustainability risks in their investment decisions. This will also apply to financial advisors and their investment or insurance consulting services.
    • EU Taxonomy Directive establishes clear criteria for the classification of assets to identify when an asset is considered green or sustainable. It also requires providers of sustainable financial products to report on how they have applied the taxonomy to determine the sustainability of the underlying investments, to which EU environmental objectives the investment contributes and for which share of the investments the taxonomy is justified. The directive is expected to come into force in December 2020 for the first two EU environmental targets (“climate protection” and “adaptation to climate change”) and in December 2021 for the other four environmental targets (“closed loop management”, “waste prevention & recycling”, “pollution reduction” and “sustainable use and protection of water and marine resources”). More can be found here.
  • „Green Deal for Europe”
    The EU Commission’s “Green Deal for Europe” includes a European climate law and a plan for sustainable investments. More can be found here.
  • ESMA strategy for sustainable finance & climate-related stress tests 
    On the 6th February 2020, the European Securities and Markets Authority (ESMA) published its sustainable finance strategy, which puts sustainability at the heart of all activities. ESMA’s framework is broad in scope and includes, among other things, emission certificates, ESG ratings of EU investment funds and so-called climate-related stress tests. More can be found here.
  • Recommendations of the Network for Greening the Financial System (NGFS)
    The Network for Greening the Financial System published six recommendations in 2019, in which they call, among other things, for climate-related risks to be included in supervision and to define supervisory expectations. More can be found here.

The recently published “Bafin memo” provides a concise overview of how to deal with sustainability risks, including recommendations for action.

New strategies and requirements for private markets

Throughout the financial market, the assessment of sustainability risks imposes new requirements on the regular business organisation, risk management and communication of financial actors: They have to deal with sustainability in a strategic and holistic way and translate sustainability risks into known risk types (e.g. market price risk, liquidity risk and credit risk) as well as ESG risks. That means no more and no less than having to review their existing business and risk strategies and convert them into a consistent ESG strategy. It is therefore not surprising that at this year’s Private Markets Exhibition in Europe – “IPEM“ – ESG was proclaimed by several leading financial players as the new imperative for private markets.

At the operational level, current developments demand financial actors to increasingly engage in stress tests and scenario analysis. They are regarded as a proven tool for assessing corporate and investment risks. Especially when applied to climate change, they help to assess future climate developments. The French banking group and asset management company BNP Paribas is one of the leading players that already integrates climate scenarios into risk management.4

Furthermore, the requirements on communication in the context of sustainability have increased in the private markets: complex issues need to be assessed and communicated in a transparent and comprehensible manner for all relevant stakeholders. The forthcoming EU Transparency Directive and increasing ESG reporting will contribute to making communication on sustainability risks in the financial market more comparable and effective.

Digitising the investment process with the “ESG Management” solution

One of the biggest challenges for professional ESG management is the large amount, complexity and aggregation of ESG data, as well as the need to ensure data quality and security. In the course of digital transformations (see: trend 5), software solutions are increasingly important in meeting this data challenge. One of the biggest challenges for professional ESG management is the large amount, complexity and aggregation of ESG data, as well as the need to ensure data quality and security. In the course of digital transformations (see: trend 5), software solutions are increasingly important in meeting this data challenge. In the BNP PARIBAS global ESG survey 20195, the surveyed institutional investors and asset managers named the following areas of potential use for digital solutions in the context of the professionalisation of ESG management processes:

  • Aggregation/analysis of ESG data
  • ESG reporting at all levels (company, portfolio and fund)
  • Increased depth of ESG-specific data for research
  • Creation and tracking of an ESG index
  • Creation of company profiles
  • Creation of new products based on the principle of sustainability

WeSustain’s “ESG Management” solution – a software for professional ESG management in the entire investment lifecycle of private market investments or alternative investments – has been designed to meet these requirements. It primarily supports portfolio, asset and risk manager who have to report ESG relevant data and manage ESG risks. The solution is also suitable for investors who want to make investment decisions based on ESG criteria. In addition to controlling relevant workflows centrally, software user can collect, evaluate and report ESG data securely. With the data management approach of the “ESG Management” solution, user gain a greater depth and significance for ESG data management. Developed as a collaborative IT infrastructure, the software enables easy and transparent networking and the integration of existing ESG tools via common interfaces in the company.

An agitated decade is on the horizon

This trend report throws a glance at the future of private markets and shows which trends the sector will be driven by during the new decade. It has become clear that sustainability has found its way into the business models and strategies of private market players and will continue to do so as a result of market pressure and future regulations. In the long run, there will be no way around sustainable finance.

In times of climate change and global sustainability goals (SDGs), ESG has become the imperative for private markets to implement a new growth formula. The challenge is not only to introduce a consistent ESG strategy, but also to transform the business organisation itself. This also includes the question of “diversity and inclusion”, as up to now only 20% of employees in private market companies are women. In addition, the potential of digital technology must be leveraged and the speed of its further development accelerated. To achieve this, private markets must build up digital expertise and integrate digital tools into the investment process to an increasing extent. Algorithms and machine learning will ultimately make their own contribution to optimising the quantity and quality of relevant data.

It can be assumed that we are facing an agitated decade for private markets.

Note:
Learn more about WeSustain’s ESG Management solution and discover the functionalities for your ESG compliance in an individual demo.

Request a demo now

1 McKeansey & Company, “A new decade for private markets – McKinsey Global Private Markets Review 2020”, LINK, 15.03.2020.
2 McKeansey & Company, “A new decade for private markets – McKinsey Global Private Markets Review 2020”, LINK, 13.03.2020.
3 Zukunftsinstittut: LINK, 11.03.2020.
4 LINK, 11.03.2020.
5 BNP PARIBAS: “Die globale ESG Befragung 2019 – Institutionelle Investoren und Asset Manager legen ihre Strategien zur ESG-Integration fest”, S. 29,  LINK, 18.10.2019.