In a time where ESG is on the rise, many companies are still plagued by the lack of concrete ESG-focused regulation in their sectors.
Confluence recently noted that sustainable investing disclosures in the US are currently governed by general fraud prohibitions in advertising and not be formally defined rules.
The company added, “In the absence of ESG regulations, investment managers have latitude to define relevant ESG factors when marketing their strategies. Such lack of standards can lead to “greenwashing “- or making claims that a strategy is more sustainable than it is. But the end of that era may be coming soon.”
Earlier this year, the US SEC proposed a new rule requiring listed firms to disclose climate-related risks affecting the corporation and information about greenhouse gas emissions. It also proposed disclosure requirements for registered funds and investment managers making ESG claims.
Confluence remarked that there are some key challenges for an investment manager implementing an ESG strategy. The firm said it is critical portfolio managers and traders are aligned with operations, compliance and marketing teams.
Investment managers considering offering ESG strategies need to establish an effective ESG framework and implement a tailored solution. Confluence provided three critical points for businesses to remember.
First of all, businesses must understand the regulations. Confluence explained, “It’s imperative to stay on top of existing and emerging ESG regulations in the US and worldwide. Investment objectives with ESG strategies need to be clearly defined and investment managers must develop a process to follow their policies and procedures.
“They must ask what ESG risks and opportunities need to be disclosed? Is the ESG framework designed to minimize exposure to future litigation and regulatory risk? Is there a process for documenting the work that is done? When looking at current ESG regulations and those that could follow, firms can consider forming an ESG committee that reviews procedures and stays on top of the latest ESG regulations.”
Secondly, firms should invest in best data practices. With ESG data inconsistency, the lack of data harmonisation and bias around how ratings are determined, there are ongoing challenges in this area for investment managers.
Confluence said, ‘The U.K. and E.U. have proposed regulations to create more consistent and transparent data. The U.S. may adopt similar measures in the future. Firms need to conduct a comprehensive inventory of their internal data and develop an ESG data framework to capture and track relevant data. This approach establishes best practices for ESG reporting, provides ESG leaders with relevant reporting data and trends, and sets the organization up for future requirements to disclose ESG data.”
Lastly, companies should determine the budget. “It is critical to dedicate sufficient resources to offering an ESG strategy. The cost of the solution will depend on the size of the firm and complexity of the strategy. While it may not be practical for every firm, larger firms could benefit from building a dedicated ESG unit focusing on ESG-specific factors. Getting the funding you need can be a long process, so remember to start securing it early,” said Confluence.
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The European Banking Authority (EBA) recently released a report on the integration of ESG risks for the purposes of the prudential supervision of investment firms.