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A Discussion on ESG and the Role of Compliance

The Sustainable Finance Disclosure Regulation (hereinafter “SFDR”) "lays down harmonised rules for financial market participants and financial advisers on transparency with regard to the integration of sustainability risks and the consideration of adverse sustainability impacts in their processes, and the provision of sustainability‐related information with respect to financial products".

What are the main challenges for a Compliance Officer nowadays?

Compliance officers face several challenges in meeting SFDR's reporting and disclosure obligations, including:

  • Collecting and managing a significant amount of data related to sustainability factors, such as sustainability risks data, metrics and indicators, and sustainable investment objectives.

  • Classifying and disclosing financial products as sustainable or ESG-focused.

  • Managing the compliance/ESG risk exposures of the Company, taking into account all the activities carried out by the latter and the different appointed business owners, in line with the three lines of defense model.

What should we do as Compliance Officers?

Compliance officers should ensure that the Company is gathering data from various sources, standardizing it, and integrating it into reporting frameworks while maintaining transparency and reliability. Therefore, robust data collection processes need to be established to ensure accuracy and reliability.

Compliance officers should also develop appropriate methodologies for classification, considering the distinctive characteristics of each product, and ensure that mandatory disclosures are accurate, consistent, and in accordance with SFDR requirements.

Leveraging automation and technology solutions could contribute to greater efficiency. However, a robust compliance strategy can only be accomplished through excellent collaboration between Compliance and other departments. Sharing expertise according to the relevant roles and responsibilities within the firm, while respecting the 3-line of defense model, is crucial for adequate and complete monitoring of the ESG/compliance risk exposure of the Company.

This is particularly true given the complexity of certain funds, for example, the so-called "Article 9" funds, where the complexity of choosing and calculating the benchmark can sometimes require joint review with Risk Management and support from Portfolio Managers.

Further, diligent collaboration with the RR and RC is crucial in verifying the authenticity of green claims and relevant financial / non-financial impacts. This shall ensure that sustainable finance is genuinely driving positive environmental change, and not being misused as a cover for illicit activities.

Shall we wrap up?

Compliance officers should ensure that the implemented compliance risk assessment and compliance monitoring plan is executed at the level of the activities carried out by the Company, and that all different business owners processing ESG impacts are aware of the risks faced by the Company and the relevant risk appetite set by the board.

While Compliance is encouraged to delegate ESG related activities to different business owners, in accordance with the 3-line of defense model and the relevant area of responsibility impacted by ESG, Compliance maintains a key role in ensuring the overall compliance ESG framework is adequately set-up and functioning effectively/efficiently.

Compliance should not shy away from delivering dedicated training that covers the Company’s/departments’ business specificities and shares the results of the testing performed according to the compliance monitoring plan with the different business lines. Guiding the other lines of defense through dedicated remediation plans is also crucial. It's important also to remember that all these ESG activities should be fully integrated within the management information flow addressed to key stakeholders, including the management/governing bodies.

To achieve an effective/efficient internal control framework, it's important that Compliance is not in charge of all the ESG activities. A three-line of defense model should be respected by allocating different responsibilities among the various business lines. In this scenario, the Compliance function would be able to monitor and assess the overall ESG compliance of the Company in a pure efficient and effective way by leveraging the full cooperation of the other responsible lines of defense.


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