Green compliance: How to keep up with the tsunami of sustainable finance requirements.
Updated: Oct 20, 2020
Green compliance is the new buzzword of the financial sector. It’s not about the compliance department’s change to electric vehicles, but rather the compliance requirements imposed on firms to stay on top of the EU sustainable finance regulation. It’s about the actions needed to be taken by the institutions to avoid greenwashing and add weight to their strategic bets on sustainability.
The main drivers are the EU’s regulatory action plan on sustainable finance, which sets strict requirements for financial institutions, as well as the increasing customer awareness and demand for sustainable products.
The forthcoming regulatory requirements for sustainable finance represent both an opportunity and a challenge for the financial sector. They require financial institutions to have a strong focus on a multitude of facets, such as sustainability strategy, product offering, risk management and internal skills to ensure compliance, but they also level the playing field for providing genuine sustainable services. At PwC, we help build trust in the service offering and have worked extensively with clients on sustainability aspects to ensure regulatory compliance with the EU action plan on sustainable finance. Given the magnitude of the regulatory tsunami, the task of ensuring compliance can fittingly be labelled “green compliance”.
"Green compliance is the new buzzword in the financial industry. Market players who want to take part in the sustainability agenda must put significant effort into complying with the wave of new regulations on sustainable finance”
Tobias Søttrup, Director, Financial Services Risk & Compliance, PwC Denmark
Possible greenwashing of products and services
The taxonomy regulation introduces a common classification system for sustainable economic activities. It provides a harmonised global definition of “sustainable” activities. The disclosure regulation builds on this system by tying the activities to the products and services offered by the institutions. It differentiates between brown products, light green products (art. 8) and dark green products (art. 9). Collectively, the purpose of the regulations are, i.a., to avoid greenwashing and ensure transparency. As an example, the requirements entail that if an investment pursues sustainable investment objectives, the investment firm will have to disclose information on how they adhere to those sustainability objectives in their investment decisions. It might seem self-evident, but the underlying requirements are substantial and include revisiting the product approval process, the product offering, the investment processes as well as data and IT.
Customers’ ESG preferences - “the new normal”
The changes in securities and capital market regulations entail that investment firms and insurance distributors must ask and take into account customer ESG preferences while also seeking competitive returns. In addition to the regulatory requirements, there is an increasing demand from customers to invest in sustainable investments and provide sustainable services. ESG investing will be “the new normal”. Moreover, by taking ESG preferences into account, investment firms must be able to offer products that live up to the specific ESG preferences. The integration of the customer ESG preferences entails a revisit of the suitability process and assessment as well as product offerings.
Management of “sustainability risk”
The new requirements introduce the concept of sustainability risks to investment processes, at product level and in risk management frameworks. The integration of sustainability risks implies that investment firms must decide on their definition of sustainability risks and how to work with these in practice. The defined sustainability risks require new or altered processes, policies, guidelines and investment strategies. Moreover, they must be reflected in the product offering and supported by available data. This may prove a significant task for all impacted financial institutions.
You can read more about sustainable finance on PwC’s website.
Partner, Financial Services Risk & Compliance, PwC Denmark
M: 3945 3212
Director, Financial Services Risk & Compliance, PwC Denmark
M: 3945 3520
Marie Louise Andersen
Manager, PwC Denmark
M: 2452 8672