Assessing ESG Data for Suitability & Appropriateness
The criteria many ESG investments are based on include, but are not limited to:
Environmental practices: Energy use, emissions, air quality, water use, waste and pollution output as well as resource reduction efforts.
Societal: Harassment and discrimination lawsuits, board and organisational diversity, human rights, social involvement or involvement in worthy causes.
Corporate governance: Executive salaries, board independence and composition, labour practices, etc.
Assessment of the data collected to meet the ESG investment criteria on a Client / KYC basis would follow the standard procedure for investor protection depending on the type of Investment service provided, Client Categorisation (retail client / professional / eligible counterparty) and Complexity of the ESG investment involved. As with other financial products, assessing the data for ESG investing on a client basis would follow the standard five categories:
The type of clients to whom the product is targeted
Knowledge and experience
Financial situation with a focus on the ability to bear losses
Risk tolerance and compatibility of the risk/reward profile of the investment with the client.
Client’s objectives and needs
Measure the level of unmanaged risks compared to the managed risks in ESG Investments
By risk rating each sector
By risk rating each company /entity/ fund held in the investment individually
By risk rating the investment as a whole
Take into consideration the ESG standards currently in place:
Sustainable Finance Disclosure Regulation (SFDR), a European regulation introduced to improve transparency in the market for sustainable investment products, to prevent greenwashing and to increase transparency around sustainability claims made by financial market participants.
International Sustainability Standards Board (IFRS), a standard-setting body established in 2021-2022 under the IFRS Foundation, whose mandate is the creation and development of sustainability-related financial reporting standards to meet investors' needs for sustainability reporting.
Principles for Responsible Investment (PRI), an international organization supported by the UN that works to promote the incorporation of environmental, social, and corporate governance factors (ESG) into investment decision-making.
Sustainability Accounting Standards Board (SASB) has a mission to establish industry-specific disclosure standards across ESG topics that facilitate communication between companies and investors about financially material, decision-useful information. Such information should be relevant, reliable and comparable across companies on a global basis. SASB standards are used by companies around the world in a variety of disclosure channels, including their annual reports, financial filings, company websites, sustainability reports, and more.
Global Reporting Initiative (GRI) is an international independent standards organization that helps businesses, governments and other organizations understand and communicate their impacts on issues such as climate change, human rights, and corruption.
Task Force on Climate-Related Financial Disclosures (TCFD) was created in 2015 by the Financial Stability Board (FSB) to develop consistent climate-related financial risk disclosures for use by companies, banks, and investors in providing information to stakeholders.
Implementing Client Sustainability Preferences
FAI Comply can assist with the implementation of procedures to ensure your firm maintains regulatory compliance considering ESMA’s new rules. Please contact us to discuss your firm’s specific requirements and to discover how our team of experts can assist you with achieving and maintaining full regulatory compliance.