How should Managers prepare for the anti-greenwashing rule? – Part Two

In Part One of our article, we explored the FCA’s anti-greenwashing rule and how sustainability risks are exposing vulnerabilities in asset manager operating models. Part Two sets out what asset managers should be doing to address these vulnerabilities and enhance their end-to-end operating models.

Addressing potential sustainability risk gaps within an asset manager operating model begins with 1) setting up robust governance at both an individual and committee level and 2) enhancing the control environment to avoid unnecessary regulatory and reputational risks. This often requires a firm-wide approach given the far-reaching impacts of embedding sustainability.

Firms need to be able to:

• understand client needs
• develop compelling sustainability product offerings
• create scalable investment policies and strategies
• oversee sustainability commitments and adverse impacts
• report on sustainability risk exposure
• value add to client portfolios and
• perform various other sustainability disclosure requirements.

This means that foundational capabilities within data and architecture, team skills and knowledge, structured policies and procedures and strong relationships with third parties are critical to a firm’s management of sustainability risks.  So, what can asset managers do…now?

1. Appointment of an Executive-level accountable owner for sustainability risk so that there is senior level ownership and accountability. Conduct workshops across the three lines of defence to clarify the respective roles and responsibilities with respect to sustainability risk, including how it is identified, assessed, monitored and reported. Clearly document the respective roles, responsibilities and escalation channels.
2. Conduct a review of the governance forums and escalation channels. Update the respective terms of reference to ensure that there is clear oversight and escalation channels for sustainability risk issues. Upskill Board/Committees members to ensure that they fully understand their role and are able to provide appropriate oversight and challenge. Set up a board-level sustainability risk appetite statement including qualitative and quantitative thresholds, to inform risk monitoring and reporting.
3. Design process flows with clear ownership which clearly set out the steps that need to be taken by each team, ensuring that there is independent oversight throughout the process. Implementing additional controls such as checking that the statements made within Task Force on Climate-Related Financial Disclosure reports align with marketing materials, policies and procedures.
4. Conduct a sustainability risk assessment to understand where you are most exposed to sustainability risk across your business and any gaps or weaknesses in the control environment. Prioritize recommendations to put processes and controls in place and address any weaknesses in the design or operating effectiveness of controls.
5. Create an incident response plan and line up individuals so that you can respond quickly and effectively to any allegations or regulatory queries. Conduct regulatory horizon scanning to understand how you may need to respond to upcoming regulations and regulatory actions.

If you would like to discuss your firm’s efforts to prepare for the anti-greenwashing rule and/or sustainability risk management more generally, please contact us.