Compliance must play a more significant role in managing ESG risks and developing strategy, execution, and reporting requirements.
The rise of sustainable finance legislation prompts chief compliance officers (CCOs) to reconsider their role in environmental, social, and governance (ESG) issues. With a lack of standards and legal and supervisory requirements in flux, CCOs wonder about their responsibilities for ESG. "How can we show what we are committing to, so we live the walk, not just speak the walk?" said one compliance executive. Firms require reliable data to correctly and consistently monitor progress against promises and ensure that progress disclosures are adequately regulated.
CCOs must, at the very least, collaborate with others to have a better grasp of what is going on in sustainable finance and ESG inside their organisation. Must integrate The compliance team into the firm's broader sustainable finance operational strategy. CCOs must be active leaders in ESG, sitting at the ESG leadership table and asking difficult questions about process and implementation (pdf).
Greenwashing is a rising problem in the United States. It occurs when an organisation makes false or unsubstantiated claims about how its products and services are more environmentally friendly than they are. European regulators are already investigating.
The phrase "greenwashing" initially referred to linkages to the environment; it relates to a more extensive range of goods, such as COVID-19 resilience, gender and racial issues. In Europe, there is growing investor and public scrutiny of gaps between sustainability plans and operational actions.
As more financial services businesses make substantial pledges to sustainable finance, ESG-related compliance risk is scrutinising.
Compliance may help determine if the company has the proper controls to handle these risks and can pressure the organisation to have the necessary capabilities to manage them.
CCOs, on the other hand, cannot fix the standards on their own. They must concentrate on the areas where compliance risk manifests itself (i.e., ESG-related investment funds, sustainability-linked loans, green or social bonds, and ESG-related investment advice).
The ESG focus of a product should be clearly expressed in its name. And then constantly reflected in its objectives, investment strategy, and holdings. It ensures that a product accomplishes its claims and meets consumer expectations.
One of the top three problems for financial services businesses is sustainable finance. Compliance plays a clear and growing role that requires considerable cross-functional leadership and the capacity to implement the plan confidently.