Our ESG blog series continues with this post exploring the different regulations that have, and are, coming into force. We look at how RegTech vendors are coping with all of these standards and frameworks and we hear from someone within a regulated firm to get their perspective.
ESG regulations are coming in thick and fast. The EU has published amendments to previous regimes such as the MiFID II, UCITS and AIFMD, IDD and Solv II regulations to include suitability preferences and assessments. These build upon concepts introduced in the disclosure regulations and are expected to come into force mid next year. Some firms are already ahead of the game and have implemented the necessary changes already.
The European Commission has also published the aforementioned disclosure regulations and the taxonomy, both attempts to standardise a common framework and understanding across the market. The taxonomy will require firms to make strategic business and policy decisions regarding their approach to ESG, which will then be disclosed on the firm’s website and in pre-contractual and periodic disclosures, including outlining the environmental impact of portfolios. The focus of the Disclosure Regulation is the provision of information to investors, clients and other stakeholders, clearly defining “sustainable investment”, “sustainability risk” and “sustainability factors”. The preparation of accurate and comprehensive information on ESG will expedite significant system and control changes for many firms, however, this will also require a significant allocation of resources.
The above regulatory framework is specific to the EU, and therefore Brexit may well have an impact. HM Treasury has noted that the Disclosure Regulation specifically is unlikely to be implemented ahead of Brexit, and therefore whether the UK adopts all of the proposed ESG reforms in the same form as they are at EU level, remains to be seen. HM Treasury has expressed a more flexible viewpoint, stating regulatory guidance on ESG disclosures may be more helpful than a prescriptive legislative framework (as is contemplated at EU level). Stemming from the UK’s wishes to maintain regulatory equivalence in a post-Brexit environment, and given the impact of the new ESG regime is broader than those geographically situated in the EU, it seems likely that UK managers will be required to factor the reforms into their activities.
How are RegTech Vendors coping?
As a result, leading and incumbent vendors have allocated significant resources to developing products and solutions that can assist market participants in meeting these new and incoming regulatory obligations. The aim is to align the features, benefits and capabilities of their solutions to the largest combination of regulatory requirements globally. The likes of MSCI Carbon Delta, S+P TruCost and ISS have all had success aligning their solutions to numerous regulatory regimes and supervisory bodies requirements around ESG and the necessary disclosures.
As evidenced by our market map, the subcategory from within RegTech Associates proprietary taxonomy that is growing the fastest, are solutions focused on disclosure and reporting, and we see leading players from other subcategories entering this space. The topic of materiality is a common theme, but the jury is still out amongst investors, regulators, and the industry as to whether to adopt standards on material ESG information, but defining exactly “what is material” still needs to be resolved.
In other parts of the world, these changes are also happening quickly. The UK, EU (FR, DE) and Swiss markets have always been thought of as market-leading with respect to sustainability and ESG investing, and conversely, the US has often been thought of as somewhat lagging behind, given the relative size and importance of its capital markets. Reporting obligations from the Taskforce for Climate-related Financial Disclosure (TCFD) have recently been made mandatory in New Zealand, which clearly shows the global direction of travel.
View from a regulated institution
We heard from Sean MacHale, Head of ESG at Bank of Ireland M&T, regarding how to remain at the forefront of ESG investing, whilst remaining compliant to internal policy as well as global regulatory and supervisory bodies:
“Technology is playing an essential role today in the capture and management of data which continues to grow as the regulatory environment evolves and as the data universe grows when looking through to scope 3 emissions. Through leveraging technology and big data through AI and ML (Machine Learning), ESG will continue to accelerate as advanced data validation and analytic tools provide more real-time insights which help not only the investment decision but also ensure the robustness of the information that decisions are based on. Those who embrace technology development and deployment will reap the biggest rewards.”
Clearly, those vendors that already have a track record of success, an existing footprint in the market, and align their solutions to the most commonly encountered regulatory and supervisory regimes will be an easy choice for buyers of ESG Technology, but how can you stand out from the crowd in a highly competitive environment?
Interested to hear more? Have a look at the other blogs in our ESG series. Get in touch with RegTech Associates to understand more about how we can help you with your ESG RegTech related queries and challenges.