Software to Manage ESG Compliance
Regulatory and investor expectations around Environmental, Social and Governance are quickly and continually developing. To keep pace and demonstrate their commitment to upholding ESG principles, firms need a solution to monitor risks and efficiently and effectively manage the due diligence of both externally managed funds and internally managed investments.
ESG Compliance Manager provides firms with a platform that streamlines and automates the management and evaluation of Environmental, Social and Governance data to highlight risks and identify the appropriate disclosures for stakeholders and investors. With ESG Compliance Manager, firms can:
- Automate ESG due diligence, risk assessments, onboarding activities, alerts, and workflows
- Collect ESG data from across the firm, portfolio companies and other external sources
- Score and classify ESG information to assess risk using a scoring matrix pulling information from multiple sources including questionnaires and third-party data
- Manage user assignments to ensure timely data collection, follow-ups, and response to third-party requests
- Provide an auditable single source for ESG compliance data
What is ESG and why is it so important right now?
Also known as sustainable investing, ESG investing looks at Environmental, Social and Governance principles to focus on building portfolios that aim to promote social good. According to Morningstar, ESG funds accounted for $51.1 billion of net new money from investors in 2020, more than double than the prior year and the fifth consecutive annual record.
A Priority Across the Globe
The SEC recently formed the Climate and ESG Task Force in the Division of Enforcement, with the goal of developing initiatives to proactively identify ESG-related misconduct. The SEC also issued the Risk Alert The Division of Examinations’ Review of ESG Investing to provide observations from recent exams and a Statement from Commissioner Hester M. Peirce provides additional context to go along with the Alert.
European Union regulators have also continued to ramp up ESG disclosure requirements. The Sustainable Finance Disclosure Regulation (SFDR), considered by the European Commission as the basis of their action plan on sustainable finance, came into effect in March of 2021. The regulation provides guidance on sustainability-related disclosures and applies to Financial Market Participants and Financial Advisors within the EU. In the United Kingdom, the Financial Conduct Authority (FCA) has published new proposals on climate-related disclosure rules for listed companies and certain regulated firms. According to Sheldon Mills, Executive Director of Consumer and Competition at the FCA, the proposed “new rules will help markets, investors and ultimately consumers better understand the impact of climate change and make more informed decisions.”
In the APAC region, Taiwan is leading the way in ESG disclosures according to the latest Bloomberg Environment, Social and Governance (ESG) disclosure scores. In addition, the Financial Supervisory Commission (FSC) has provided a Green Finance Action Plan and mandated that listed firms disclose their power and water consumption and waste management practices starting in 2022, so investors can evaluate their ESG performance. The Monetary Authority of Singapore is also working on a Green Finance Action Plan to promote sustainability best practices in the financial services sector.
As individual countries continue to develop ESG regulations, the International Organization of Securities Commissions (IOSCO) has indicated an urgent need for globally consistent, comparable, and reliable sustainability disclosure standards. According to Ashley Alder, IOSCO board chair, “We fully accept that jurisdictional approaches are bound to differ. But for corporate reporting, at the real-economy level, I think it’s essential that these domestic approaches will be fully interoperable with an emerging global baseline,”
The recent regulatory activity is in response to increasing demand from investors for information about ESG issues—and should serve notice to firms that it’s time to pay attention. It’s crucial that firms start to think about having a framework in place to manage ESG issues.
Greenwashing and the Challenge of Due Diligence
Investors are increasingly wary of “greenwashing”. Greenwashing is when the extent of ESG integration in an investment strategy is exaggerated. Self-reported ESG data is a start, but unverified information should be subject to due diligence. Does the firm do what they say they do? Are firm policies comprehensive, or is the ESG policy simply a "tick the box" statement? Is the investment firm leading—or lagging—its peer group in terms of ESG behaviors?
Regulatory bodies want to ensure that firms adhere to their own ESG claims and that investors understand what they are getting when they choose a particular adviser, fund, strategy, or product.
Regulators recommend that compliance teams focus on three broad elements:
- Portfolio management, including policies, procedures, and practices related to ESG and the use of ESG-related terminology; due diligence and other processes for selecting, investing in, and monitoring investments given the firm’s disclosed ESG investing approaches; and consistency between proxy voting decision-making processes and ESG disclosures and marketing materials.
- Performance advertising and marketing materials, including a review of regulatory filings; websites; reports to sponsors of global ESG frameworks; client presentations; and responses to due diligence questionnaires, requests for proposals, and client/investor-facing materials.
- Compliance programs, including a review of written policies and procedures and their implementation, compliance oversight, and ESG investing practices and disclosures.
The big challenge is gathering the appropriate data required to complete an ESG evaluation of a firm. This data is readily available through a variety of vendors for publicly traded firms, but it is much more difficult to gather it for private firms. The data required is also different depending on the type of company and the industry it is in.
ESG Risk Assessment for Externally Managed Funds
ESG Compliance Manager helps Investment Advisers with the risk assessment of offerings recommended to clients including Funds, Hedge Funds, Managed Account offerings and Private Fund offerings via due diligence questionnaires that are sent to third-party providers. Initial ESG risk assessment and compliance due diligence can also be conducted on sub-advisers, along with anti-corruption tracking of sub-advisers during the onboarding process.
ESG Due Diligence for Internally Managed Investments
ESG Compliance Manager enables Investment Advisers to build comprehensive ESG risk profiles on the business entities that they are investing in. Due diligence questionnaires can be configured based on the type of firm and industry segment to collect data to efficiently review and assess the ESG risks presented by each of the assets invested in, and also identify and document the appropriate disclosures.
Integrated Compliance with MyComplianceOffice
ESG Compliance Manager is part of our Know Your Third Party (KYTP) solution, which helps firms oversee due diligence activities associated with third party relationships including vendors, customers, counterparties, agents and partners. KYTP enables organizations to automate their initial and ongoing data capture and due diligence activities as part of a third-party oversight compliance program, including third party on-boarding activities, initial and ongoing third-party data management, ongoing third-party due diligence and anti-bribery / anti-corruption.
The integrated MyComplianceOffice platform enables firms to easily manage the elements of a global compliance program, addressing employee, transactional and third-party compliance.
Contact us today for a demo or to learn more about how MCO can help your organization manage ESG Compliance.
