Bringing sustainability into the spotlight for regulatory compliance

Sustainability, closely tied to environmental, social, and governance (ESG) criteria, has been a present conversation in the financial services sector for some time. However, only recently are we seeing it come to fruition in the context of compliance and corporate strategies.

Although many firms have started to build out their strategic sustainability models, the impacts of growing ESG requirements on individual regulatory compliance are still unknown. As a result, firms will soon need to think about regulators and how they need to adapt their processes and educate their people – from documentation to validating frameworks to reasonable steps.

Why are financial firms looking at sustainability

As the term ESG suggests, many areas of financial business models are being addressed in this transition, including investment services, such as environmental funds and sustainable funds, as well as cultural and social focuses, such as inclusivity and diversity.

This is being driven from several angles. Sustainability is considered a competitive selling point, or even a must-have, by much of the market, and so firms are adapting their practices to meet client demands.

Having a sustainable offering is also a good business opportunity, adding another string to a firm’s bow and demonstrating a proactive investment stance. KPMG states that investing in ESG-related financial products and services has spiked; “global ESG investing is estimated at over $30 trillion AUM (Assets Under Management), by 2025 it is expected that approximately a third of all global AUM are forecast to have ESG mandates.”

In short, sustainability and its associated targets and initiatives are becoming as key a factor as digital transformation or growth in a company’s overarching strategic objectives. It will have a large impact on firm operations, from hiring new roles to implementing new requirements and assessments across departments.

Individual regulatory compliance and sustainability

Despite its current prominence, sustainability is still an evolving concept for financial services, without specific standards for implementing this within an organisation and its services.

As a result, the impacts on individual regulatory compliance are not yet defined. Nevertheless, any changes to corporate ESG regulation will inevitably need to be actioned at an individual level, affecting people’s roles, requirements, and accountabilities.

The first step in this journey is to set up the framework and work outwards, considering what targets each area of the firm may need to meet, and then going more granular to evaluate what certain individuals need to achieve to support this.

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What regulators are looking for

While there are no certainties at this stage, this is what we expect regulators will likely be asking for from your organisation and your individuals surrounding ESG and sustainability compliance:

  • Documentation: Documents regarding ESG practices, most importantly to evidence these in line with ESG policies.
  • Portfolio management: Demonstrating consistency between ESG policies and the firm’s portfolio management practices, such as monitoring investments in regard to ESG criteria, and evidencing these practices and due diligence.
  • Proxy voting: Establishing a process, record, and disclosures for proxy voting practices.
  • Governance: Oversight and good governance will need to be established effectively, such as through training senior management.
  • Funds: Ensuring there are funds with names that clearly reference ESG factors and that address the portfolio’s alignment with relevant criteria.
  • Advertising and marketing: Ensuring claims about ESG metrics, performance, or investments, as well as other related reporting, are accurate and met.
  • Resource: Providing compliance resources for ESG monitoring and oversight.
  • Supply: Looking at vendor and supply chain ESG metrics and demonstrating their adherence, maybe establishing a scorecard.
  • Training: Consistent, quality and frequent ESG training for staff.

How Trailight can support your sustainability frameworks

Trailight is an automated platform for managing individual accountability and human-centric governance. It will support your organisation to create, systemise, and evidence your sustainability frameworks as they develop, so you can embed good governance with your team from the start.

As a company, we follow an ESG approach for our own practices as well as in the solutions we provide for our clients, making us a trusted partner to support you throughout this journey.

Find more information about the Trailight capabilities and how they can support you to adapt and systemise your compliance frameworks.