Magazine Forum: ESG Compliance – Legal Risks Rise as Regulators Focus on Explosion of Sustainable Investing | Thomson Reuters Regulatory Intelligence and Compliance Learning

Environmental, social and corporate governance (ESG) issues have become a strategic priority for many executives and boards of directors around the world

Almost all industries are affected by the collective efforts of governments to tackle climate change, the effects of which have become too glaring in 2021. The recent United Nations science report further highlights the limited options nations and organizations face to prevent future disasters, the UN secretary general calling the study a “red code” for humanity.

Financial services have a vital role to play in the climate battle. As a provider of capital to industry and investment channels for individual wealth, industry plays a central role in managing the transition from an economy dominated by fossil fuels to an economy supported by renewable energy. . In view of this responsibility, financial authorities in all regions have stressed the need to manage a wide range of issues, including climate change, human rights and human diversity, as well as other traditional risks.

For investment management and brokerage firms, global and regional financial authorities have presented proposals for common standards and measures for sustainability-related disclosure rules to help investors understand the opportunities and risks ESG investments. These disclosure requirements come as ESG-related investments have exploded, with sustainable investments totaling $ 35.3 trillion in 2021, or more than a third of all assets in five of the world’s largest markets, according to estimates.

With sustainable investing being relatively new, however, international regulators are concerned about whether investors – especially small retail investors – understand what they are buying and whether the companies offering such investments are providing adequate information.


A major concern is what is called greenwashing, or the marketing of products as being environmentally friendly when in fact they are not. In the European Union (EU), many of the measures being developed are designed to reduce the likelihood that greenwashing can occur. That said, greenwashing remains a concern.

In January 2021, the results of a website filtering exercise conducted by the European Commission and national consumer protection authorities indicated that they “had reason to believe that in 42% of cases the claims were exaggerated. , false or misleading and could potentially qualify as unfair. Business practices under EU rules. The ‘sweep’ analyzed green claims made online in various industries such as clothing, cosmetics and household equipment.

In addition, in July, the UK’s Financial Conduct Authority (FCA) issued a Dear CEO letter to presidents of authorized fund managers setting out expectations for the design, delivery and disclosure of ESG and sustainable investment funds. The FCA report states that “we have seen many applications for approval of investment funds focused on ESG or sustainable development. A number of them were poorly drafted and fell below our expectations. They often contain claims that do not stand up to scrutiny.

In the United States, environmental activists have taken a more creative approach in their targeting of companies suspected of being engaged in greenwashing. Big oil and gas companies that increasingly tout their green credentials have been criticized by activists who say such claims are misleading.

It is important that compliance officers hold a leadership position within a company so that they can contribute and influence the future ESG strategy of the company.

While several U.S. states and cities have sued fossil fuel companies for greenwashing in recent years, three environmental groups took a different approach earlier this year when they filed a landmark lawsuit against Chevron Corporation. Rather than go to court, green activist groups – Global Witness, Greenpeace and Earthworks – have filed a false advertising complaint against Chevron with the United States Federal Trade Commission, which enforces the rules against misleading advertising. .

The three organizations hope their complaint to the federal agency will gain more weight than a lawsuit filed in federal or state court and set a marker for further action against greenwashing.

Then there is the growing interest from US regulators. A recent risk alert from the United States Securities and Exchange Commission (SEC) shed light on the most common issues related to statements made about ESG practices. Some of the main themes and concerns included the relative insufficiency of compliance programs dealing with ESG issues, with compliance staff not having a sufficient understanding of issues regarding product disclosure and marketing. The SEC also found that internal controls were inadequate to maintain and monitor ESG mandates, guidelines and restrictions.

There is evidence that financial institutions are taking note. After recent reports suggesting that the SEC and other US authorities are investigating Deutsche Bank’s asset management arm, DWS, the unit’s former head of sustainability said DWS had exaggerated its adherence to the principles. ESG.

ESG as a strategic priority

ESG is a cultural enterprise for financial services companies, and corporate governance is a main component of it. It would be impossible to achieve the objectives of sustainable finance if all companies did not integrate the necessary approach at the heart of their culture and their strategy. This makes the “G” of ESG fundamental to the success of future gains in sustainable finance.

Governance is the part of ESG that makes the whole package cohesive. Without governance, environmental and social aspects are not achieved and the ESG initiative fails. ESG requirements must be integrated into a company’s strategy, culture, risk management and operational control systems, such as data governance, third-party management, etc.

Strategy, culture and politics

Boards should ensure that within their organizational structure there is clear accountability for ESG matters. This is essential for integrating ESG into the culture of a company. Communicating the right tone from the top is important in determining a company’s ESG approach.

In addition, boards should promote a culture of ESG respect, one that not only addresses the environmental benefits of the business, but also fosters a socially diverse environment. Company policies should be changed to reflect support for ESG issues, and these should be documented, communicated and formed in a clear and understandable way that all staff can access.

Companies must also take into account the overall impact of ESG requirements on their strategy and culture. Areas like the products they sell; the services they provide; the costs they incur through personnel, real estate, supply chain and other elements all need to be looked at from an ESG perspective. Then a conclusion can be drawn about the profitability and ethical nature of the current strategy and operations – what needs to change and how that change needs to happen.

Compliance provisions

Compliance services should be seen as key controls in a company’s ESG approach. It is important that compliance officers hold a leadership position within a company so that they can contribute and influence the future ESG strategy of the company. The effective identification and assessment of upcoming ESG regulations and best practices can be used by a company to shape this strategy. Indeed, forward-thinking companies can use the compliance function and their relationship with regulators to influence future ESG regulations.

The compliance department itself should have sufficient skills, knowledge and experience in ESG matters to advise the company appropriately. Training and skills programs, personal development plans, and recruiting strategies should all be reviewed to determine if the company has adequate ESG compliance resources.

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