The growth of ESG and sustainability in the funds industry has caught the attention of regulators who are making it hard for asset managers to keep up with them. Regulators are clearly concerned about the threat of greenwashing, the availability and credibility of ESG data, and the multitude of assessment methodologies that make it difficult to compare different ESG funds. The introduction of the EU’s Sustainable Finance Disclosure Regulation (SFDR) aims to set clear standards for entity and product level ESG reporting. However, other requirements are coming under MiFID II in addition to the UK’s own Sustainability Disclosure Regime from the FCA. There is also a growing recognition that ESG factors represent significant investment risks. All of this translates into many new risks which raise questions for investors, asset managers and fund boards:
- How are firms managing sustainability risks and do they have the right data?
- Are fund boards tracking the investment and operational risks posed by climate and other ESG factors?
- Is the asset manager’s current risk reporting framework effective and able to track sustainability-related risks?
With many questions still to be answered, we consider five sustainability related risks that asset managers should be investigating now.
1. Credibility of Sustainability Risk Oversight and Ownership
In a recent sustainability risk survey conducted with asset managers, Alpha found 80% of respondents already incorporate sustainability risks into their risk appetite or plan to do so in the next twelve months.
However, when the same group of respondents were asked about ownership of sustainability risks only 20% felt that ownership ultimately rested with the board. This is likely to be a concern for regulators who want evidence of robust risk ownership, challenge and knowledge from boards.
As graph 2 sets out below, there is no clear consensus in the market on who should own sustainability risk. This puts the onus on firms to be able to explain how their own approach and risk framework is appropriately designed and effective at overseeing sustainability risks and their potential impacts to the organisation.