Why ESG is important?
ESG (Environment, Social, and Governance) refers to the three areas where businesses commit to ensuring compliance with particular measures and objectives to be attained over the course of a medium/long-term timeframe.
Commitment is led by two drivers, often overlapping: regulatory obligations and ESG traceability needs for value chain leaders. There is no single regulation or set of rules to keep in mind, but several standards, recommendations and principles, all of them adding a piece to fit into the puzzle. Failure to stay current could expose the organisation to major regulatory and reputational issues, which could have a significant impact on the business.
Practical four-steps guide to ESG compliance
In order to effectively address ESG compliance, organisations must follow a practical four-step plan to shift from theory to execution.
Step 1: Regulatory required subjects
Companies must first determine whether they are subject to the regulatory requirements. Organisations are subject to SFDR regulation if they are either a financial market participants, such as investment firms offering portfolio management services, managers of alternative investment funds, insurance companies, credit institutions offering portfolio management services, pension funds, venture capital funds, or financial advisors offering investment advice. According to CSRD, the audience for this will grow significantly in the next years.
Step 2: Regulatory responsibilities
Organisations must integrate sustainability risks and take into account Principal Adverse Impacts (PAIs) within internal processes. Putting these guidelines into action, the following information and details must be posted on the company’s website:
- disclose sustainability risk policies: how sustainability risks are integrated into company investment decision‐making process, investment or insurance advice;
- disclose PAIs at entity level and at financial product level: what are the PAIs, how they are identified and prioritised, the company engagement policies;
- disclose whether the single financial product/service provided is Art.6 (a financial product without a specific sustainability focus),8 (a financial product that promotes sustainability characteristics) or Art.9 (a financial product with sustainable investment objective) compliant.
Step 3: Action areas
Organisations must concentrate on the following crucial areas.
Governance, organisational structure, and operational procedures: the board of directors must:
- examine decision-making mechanisms to identify roles and responsibilities for ESG issue management;
- set up adequate information flows, with proper KPIs and KRIs.
Risk management and compliance: companies must integrate the risk appetite framework (RAF) with a clear and unambiguous assessment and control of ESG risks, in line with the business strategy. The statement should clearly explain the rationale for taking or not taking certain types of risks.
Business model and strategy: in order to make strategic decisions, companies must:
- conduct a materiality assessment to identify relevant ESG topics for stakeholders to focus on;
- adapt decision-making procedures accordingly.
Reporting: businesses must disclose (in precontractual documents and on the website) information on sustainability risks that is thorough, comparable, with the following minimum details:
- communication on environmental risks’ integration within the company strategy: a “Non-financial Statement” that reflects ESG commitment and achievements has to be formalised;
- communication of financial products’ green degree: the motivations underlying the categorisation of the financial products under SFDR art. 6-8-9 have to be disclosed via the Regulatory Technical Standards (RTS).
Step 4: Ongoing monitoring
ESG compliance requires ongoing and self-sustaining processes. Companies must plan regular reviews of their governance and organisational systems, the integration of sustainability risk factors into provided services and reporting documents, updating them according to the latest regulatory developments and market best practices. Compliance will guarantee their organisations long-term viability, risk management, and avoidance of regulatory and reputational pitfalls.
Let’s discuss ESG and share our views!
Parva Consulting is involved in sustainability and is working on a number of projects to enhance the ESG compliance experience of its clients. The acquired expertise has enabled us to create an internal model that can be adjusted to meet the needs of clients from various industries and market segments.
As ESG regulation continues to develop, so do our models and theories. We are constantly talking with market participants to compare various approaches and strategies and to deepen our shared knowledge: please feel free to reach out to us to discuss your ESG needs with our team!