A measured approach: FSI COOs weigh in on ESG initiatives
Increasingly, environmental, social, and governance (ESG) initiatives have become a strategic priority for financial institutions. The recent UK Finance COO Forum explored how these initiatives are developing across the financial services sector. Among the insights gleaned from the forum is that most institutions are taking a measured approach to ESG strategy as they acquaint themselves with ESG risks and assume responsibility for setting ESG standards.
- Regulators expect financial services organizations to be ESG exemplars.
- Financial institutions understand and manage environmental risk better than social and governance risk. Many institutions do not integrate ESG risk management with broader risk management, making it difficult for them to assign accountability and model behavior for other industries.
- Financial institutions must be diligent about describing products accurately in marketing collateral and other disclosures, as regulators will closely scrutinize public information for greenwashing. Additionally, organizations should begin evaluating environmental financial crimes safeguards and compliance in light of the Financial Action Task Force’s (FATF) paper Money Laundering from Environmental Crime, published in June 2021.
- Financial institutions have been analysing their diversity and inclusion policies since the FCA published its consultation paper Diversity and inclusion on company boards and executive committees in July 2021. The regulator said it will evaluate governance of its own diversity and inclusion practices. Protiviti has learned that the industry submitted positive comments on the paper.
- Regulators have signaled that boards are accountable for establishing ESG frameworks. However, the FCA has raised concerns about organisations ‘competence washing’, or overstating their ability to understand and implement ESG practices. The FCA is expecting boards to sponsor ESG training across the organisation and to develop knowledge sufficient to challenge and enable proper oversight of ESG matters.
- Internal audit teams will need familiarity with ESG risks to adequately appraise the quality of controls. Additionally, they will play a key role in assuring the stakeholders of an organization that its ESG reporting is reliable.
- Regulatory guidance suggests that internal auditors can leverage existing compliance assessment methodologies to measure ESG compliance. In March 2021, the Institute of Internal Auditors noted, “While most regulations on ESG reporting are relatively new, the processes for evaluating the effectiveness and efficiency of any regulatory compliance regime are well-established.”