The Compliance Officer as a player in Responsible Finance

What is responsible, sustainable, green and socially responsible finance?

Responsible finance is finance that integrates extra-financial components into its economic model, such as the fight against money laundering, fraud and corruption, and the protection of the integrity of financial markets. It is finance that serves mankind and the planet.

There are many different ways of defining Responsible Finance – green, sustainable, solidarity-based – which often creates confusion and exclusion. Is green finance sustainable? Is sustainable finance based on solidarity? Let’s go back to the definitions:

• Green Finance is Finance that directs its money towards projects that will contribute to the energy transition and help combat global warming. (Green bonds, carbon market…)
• Solidarity Finance is a form of finance that supports projects that develop activities with a strong social and environmental impact. It thus helps create jobs, social housing, environmental projects (organic farming, fair trade, etc.) and the development of economic activities in developing countries¹⁾Definition by the French Ministry of the Economy, Finance and Recovery.
• Sustainable finance is a form of finance that takes into account not only short-term profitability factors, but also factors relating to the sustainability and resilience of the activity in question over time, in particular by integrating a societal dimension: ESG (environment, social & governance) criteria.

A successful social & ecological transition will be one that takes into account not just the decarbonization of activities, but also all the social and environmental impacts as identified by the United Nations’ 17 Sustainable Development Goals in 2015.

Several definitions for a single objective: to make tomorrow’s finance sector a major player in change. Sustainable, green and social finance are all integral parts of Responsible Finance.

So where do we stand today?

Since the Kyoto Protocol in 1995, a number of initiatives have been launched, including the Finansol solidarity finance label (1997), UNPRI (2006), LuxFlag label (2006), SRI label (2016), Greenfin (2019), European Green Deal (2020),…

Europe, which has been committed to the production of responsible finance standards & regulations, estimated at over 2,000 legislative proposals since 2016 worldwide, is thus on the verge of delivering to investment firms a significant regulatory burden that they will have to manage operationally in a very short timeframe²⁾European regulation: AMF Doctrine & Regulation disclosure by Sarah Labbé – AFR & Scaled Risk.

• The Taxonomy regulation, adopted in June 2020, whose primary aim is to create a Community and then international language for categorizing economic activities according to their environmental externalities. To be considered “green”, the current text stipulates that an economic activity must contribute “substantially” to at least 1 of the 6 established environmental objectives (climate change mitigation, protection of ecosystems), not harm the other 5 (according to the “Doing No Significant Harm” or DNSH concept) and respect certain social minimums.

But the regulation doesn’t stop there: “By December 31, 2021, the Commission will have to publish a report describing the provisions that would enable the scope of the regulation to be extended beyond environmentally sustainable activities to include other sustainability objectives, such as social objectives“.

Implementation of the first two targets from 2022 and the following 4 until 2023.

• The “Disclosure” regulation on sustainability information in the financial services sector (SFDR) whose purpose is to describe the obligations of market players (asset managers, investment advisors, distributors of insurance or pension products based on market assets, etc.) in terms of transparency regarding their consideration of ESG (Environmental, Social and Governance) criteria in their processes and in the products offered to investors.

This regulation comes into force in March 2021

• The Benchmark regulation creates two new European low-carbon indices, the EU Climate Transition Benchmark and the EU Paris-aligned Benchmark. It also introduces transparency requirements concerning the inclusion of ESG criteria by index administrators, across all indices, in the construction of their methodologies.

Effective until December 31, 2021

• The revision of the NFRD (Non-Financial Reporting Directive), which will strengthen extra-financial reporting obligations for large companies by revising what will serve to better assess the impact of their investments on all ESG variables. The consultation took place last June, and the results are pending.

The objectives are³⁾July 2019 AMF report “European regulatory update: progress on sustainable finance work (Disclosure and Benchmark):

• Redirecting capital flows towards sustainable investments to achieve sustainable and inclusive growth;
• Manage the financial risks posed by climate change, resource depletion, environmental degradation and social issues;
• Promote transparency and a long-term vision in economic and financial activities.

What’s left to do?

As the guardians of ethics, our compliance officer professions refer to the obligation to respect professional and ethical standards, codes of conduct and specific rules applicable to an activity.

Compliance therefore goes beyond the scope of legal norms, to encompass a series of standards that are imposed on the company. It also refers to a company’s ability to put in place processes designed to ensure good governance.

In this sense, taking environmental and social issues into account will have an impact on compliance programs, updating risk mapping, procedures and controls. Just as MIFID II was a regulatory tsunami, a second wave just as big is on its way, and we need to get ready. Surrounding yourself, communicating and enlisting the help of others with regard to all these forthcoming regulations is essential if you are to maintain a robust and reliable compliance system.