Navigating the regulatory landscape of sustainable investing

Many firms have adopted sustainable and responsible investment practices, from simple screening protocols to full-on impact investing, either as a result of internal strategic priorities and opportunities, client expectations and values, or both. While marketing material and policies can be updated relatively quickly and easily, integrating these changes into investment practices is not as simple.

Despite firms’ best efforts, it is still common for invested funds to not reflect sustainable and responsible investment approaches. Understanding these gaps can help firms identify where further integration is needed.

Are you compliant with existing, or prepared for, incoming regulation?

Regulators are increasingly adopting new legislation to combat greenwashing and support fair and accurate investment practices for firms offering ESG-related products.

Under the FCA’s new Sustainability Disclosure Requirements (SDR) and investment labels Policy Statement (PS), UK asset managers wishing to use sustainability/ESG-related terminology in their fund names will be required to meet specific criteria. These criteria are supported by disclosures for the assets within their funds aligned to a set of four investment labels. Additionally, the EU markets regulator, the European Securities and Market Authority, has recently released a guideline to fight greenwashing where asset managers use sustainability and ESG terminology in fund names.

As a result, firms may need to rename or sell assets in order to comply with these regulations and avoid greenwashing.

Does your investment approach align with market maturity expectations?

With the increased risks from greenwashing, both at a firm and portfolio company level, the market is increasingly expecting firms to improve their investment approaches to reduce risk. Specifically, firms that focus on ESG and sustainable investing will be expected to have robust due diligence and ongoing monitoring processes to achieve their investment objectives.

In reality, many firms do not have the necessary granularity to consistently and accurately assess their investments for compliance with each investment mandate.

Changing market and regulatory landscape

Investment failures and greenwashing risks related to investment practices have been an increasing area of interest for both regulators and investors, as focus shifts to more social and environmental awareness.

Globally, regulatory intervention for investment failures has been increasing, such as the SEC fining German asset manager DWS $25m for misleading ESG statements and ASIC fining Mercer $11.3m for investing in alcohol, tobacco and fossil fuels, despite these being specifically excluded from investment strategies.

UK developments

The FCA has outlined its expectations for investment firms, including issuing the SDR and an anti-greenwashing rule, which come into force this year. The FCA has publicly stated it expects fines to be issued as and when issues are identified.

How RSM can help

We can provide assurance over your investment approach, from exclusionary principles to dedicated ESG strategies. Our work will support and provide confidence through:

• Completing full testing of your fund(s) underlying holdings, leveraging the KnowYourFunds platform to confirm if these are in line with your investing goals and strategies, including compliance with SDR labels if these are being applied.
• Assessing your investment approach, benchmarking this against your peers and confirming regulatory compliance.
• Providing deep dive sample testing to consider how investment controls have been designed and how these are operating in practice.

The RSM approach

The benefits of working with our financial services and ESG specialists:

• A detailed independent review on investment decision processes, including enhancement recommendations.
• Assurance that investments being undertaken are appropriate and in line with your documented approach.
• An assessment of your firm's exposure to regulatory risk and current compliance.
• A documented book of record and audit trail to evidence an assessment of your fund(s) has been conducted, which can be shared with the regulator and your auditors.

If you would like more information on any of the topics discussed above, please contact Richard Hall, or Ben Thirlwall.