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The extent to which the ESG approach incorporates forward-looking non-financial material information into expectations of returns and risks, and the extent to which it can help generate superior long-term returns is important, to stop the mispricing of risk versus returns. A stumbling block for asset managers is being able to source reliable sustainability data both from and about the companies they invest in. If they have relied on something that is not accurate this could inadvertently lead to claims of greenwashing further down the line. So whether you are preparing or reviewing ESG disclosures for compliance with regulatory requirements or for alignment with ESG best practices, in this article we take a closer look at recent disclosure proposals originating from Hong Kong, compared to a variety of proposals elsewhere, along with the proposed EU regulatory treatment of data provision.

While definitions vary regarding the form of consideration of  Environmental, Social, and Governance (ESG) risks, broadly speaking,  ESG investing is an approach that seeks to incorporate ESG factors into asset allocation  and risk decisions, so as to generate sustainable, long-term financial returns

ESG Investing Exposed — The Future of Data

In our new series of articles &mdash; &lsquo;Transformation is inevitable&rsquo;, we provide our insights based on our on-going analysis of a complex, changing and ambitious regulatory policy environment, evolving customer and employee needs, as well as advancing technology.
We already know that today&rsquo;s business and technology landscape looks very different to a couple of years ago, requiring asset management firms to take a holistic approach to transformation, including reinventing the client experience, reimagining how data flows across the organisation, and integrating technology into investment decision-making and product capabilities.
So it&rsquo;s clearly important to have an understanding of how the asset management industry is already changing, or likely to change in the future, when looking to ensure a firms ongoing success. We begin by setting out what we believe the workplace of the future will look like.
Followed by our analysis of the rapidly developing environment surrounding ESG and sustainable investment.

Nothing stays the same forever. Businesses must transform to survive in a very competitive  environment. So what will the key challenges and opportunities be for the asset management  industry over the forthcoming years? 

Transformation is Inevitable - The Vista for Asset Mangers

Since the term AI was coined in 1956, advances in computing power, the availability of enormous quantities of data and new algorithms have led to major breakthroughs, particularly in the past two decades as the use of mobile computing and communication has increased exponentially.
In financial services the use of AI and ML may benefit market intermediaries, asset managers and investors by increasing the efficiency of existing processes, reducing the cost of investment services and freeing up resources for other activities.
In response to the growth in the use of AI and ML by market intermediaries and asset managers, the Board of the International Organization of Securities Commissions (IOSCO) has published guidance to help its members regulate and supervise its use. The guidance report entitled &lsquo;The use of artificial intelligence and machine learning by market intermediaries and asset managers&rsquo; (the final report) 1 was published on 7 September 2021.
In the final report IOSCO describes how market intermediaries and asset managers use AI and ML to reduce costs and increase efficiency, noting that the rise in the use of electronic trading platforms and the increasing availability of data have led firms to progressively use AI and ML in their trading and advisory activities, risk management and compliance functions.

What do commuting, your email accounts, banking and personal finance, social networking, on-line  shopping and smart personal assistants have in common? They all utilise artificial intelligence (AI)  and machine learning (ML) to some extent.

Increasing Efficiency and Introducing New Risks — AI and ML Conduct for Asset Managers

Next Steps for the European Sustainable Finance Package

Stay up-to-date on the latest regulatory developments from our Trustee & Fiduciary Regulatory Services Team

Trustee & Fiduciary Regulatory Insights

On 1 October 2021, the European Securities and Markets Authority (ESMA) launched a Call for Evidence  (CfE) on the European Commission (EC) mandate on certain aspects relating to retail investor protection.

Protecting Retail Investors — Disclosures 

Welcome to the latest article in our &lsquo;Transformation is inevitable&rsquo; series, where we provide insights based on our on-going analysis of the complex, changing and ambitious regulatory policy environment, evolving customer and employee needs, as well as advancing technology.&nbsp;
In our first two articles we looked at <a href="https://icg.citi.com/icghome/what-we-think/securities-services/insights/transformation-is-inevitable-the-vista-for-asset-mangers" target="_blank" rel="noopener">the future of work and sustainable finance</a>, and the possible future direction of UK regulation now that the UK is no longer part of the European Union. In this, our third article, we look at the potential risks that may arise from the ever-increasing use of cloud outsourcing

The potential risks that  may arise from the ever-increasing use of cloud outsourcing.

Transformation Is Inevitable  — The Risks of Cloud Concentration

Through its previous interventions, the FCA has seen practices by some firms that cause harm.
In its most recent paper published on 7 December 2021, &lsquo;A new Consumer Duty &mdash; Feedback to CP21/13 and further consultation&rsquo;1 (CP21/36), the FCA is consulting on its latest plans to ensure a higher and more consistent standard of consumer protection for users of financial services and help to stop harm before it happens.
The FCA also wants to drive a healthy and successful financial services system in which firms can thrive and consumers can make informed choices about financial products and services.

The UK Financial Conduct Authority (FCA) is concerned that currently financial services do not  always work well for consumers.

Driving a Fundamental Shift in Industry Mindset: The FCA's New Consumer Duty

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The aim of Capital Markets Union is to get investments and savings flowing across the European Union (EU) so that it can benefit consumers, investors and companies, regardless of where they are located.
The latest proposals aim to ensure that investors have better access to company and trading data. The measures aim to encourage long-term investment and make it easier and safer for investment funds to be sold cross-border.
Overall, the proposals aim to better connect EU companies with investors, improving companies&rsquo; access to funding, broadening investment opportunities for retail investors, and further integrating EU capital markets.

On 25 November 2021, the European Commission published details of proposed legislation to help advance its 2020 Capital Markets Union Action Plan.

Next Steps Towards a Capital Markets Union

In addition to the proposals contained within the roadmap, ESMA will also continue to monitor major EU and international developments and contribute as necessary to the various initiatives in the area of sustainable finance, including in the EU Platform on Sustainable Finance, the International Organization of Securities Commissions (IOSCO), as well as in relevant workstreams within the Network for Greening the Financial System (NGFS).

The Sustainable Finance Roadmap sets out priority areas and related actions for the European Securities and Markets Authority (ESMA) in sustainable finance for the period covering 2022–2024.

ESMA Lays out its Sustainable Finance Roadmap

The proposal aims to foster sustainable and responsible corporate behaviour throughout global value chains. Companies will be required to identify and, where necessary, prevent, end, or mitigate adverse impacts of their activities on human rights, such as child labour and exploitation of workers, and on the environment, for example pollution and biodiversity loss. The European Commission says that for businesses these new rules will bring legal certainty and a level playing field, whilst for consumers and investors they will provide more transparency.

On 23 February 2022 the European Commission proposed rules for companies to respect human rights and the environment in global value chains.

Respect for Human Rights and the Environment

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The disclosure proposals will require registrants (domestinc or foreign) to include certain climate-related disclosures in their registration statements and periodic reports, including information about climate-related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition, and certain climate-related financial statement metrics in a note to their audited financial statements.
The required information on climate-related risks would also include disclosure of a registrant&rsquo;s greenhouse gas emissions, which have become a commonly used metric to assess a registrant&rsquo;s exposure to such risks.

The much-anticipated Securities and Exchange Commission proposals for enhancing and standardizing climate-related disclosures for investors were published on 21 March 2022, marking a significant step in the current US government’s response to climate change.

The Enhancement and Standardization of US Climate-related Disclosures for Investors

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<div>Welcome to the latest article in our &lsquo;Transformation is inevitable&rsquo; series, where we provide&nbsp;insights based on our on-going analysis of the complex, changing and ambitious regulatory&nbsp;policy environment, evolving customer and employee needs, as well as advancing technology.</div>
<div>&nbsp;</div>
<div>In earlier articles we have looked at the future of work and sustainable finance, the possible future direction of UK regulation now that the UK is no longer part of the European Union,&nbsp;and the potential risks that may arise from the ever-increasing use of cloud outsourcing.&nbsp;</div>
<div>&nbsp;</div>
<div>In this article we review how regulators first adjusted their agendas to tackle the impact&nbsp;of COVID-19 on financial services, pivoted towards post-pandemic course corrections, and&nbsp;what that now means, with a focus on the macro regulatory agenda, for risk and compliance&nbsp;professionals in the asset management industry.</div>

What the post COVID-19 regulatory agenda means for risk and compliance professionals in the asset management industry.

Transformation is Inevitable — The Vista for Risk and Compliance

The European Commission (EC) state that sustainability-related disclosures in the financial&nbsp;services sector should be sufficiently clear, concise and prominent to enable end investors to take&nbsp;informed decisions. The aim is for end investors to have access to reliable data that they can use&nbsp;and analyse in a timely and efficient manner.
As part of achieving this aim, the EC, by way of a Delegated Regulation, adopted on 6th April&nbsp;2022 regulatory technical standards (RTS) to be used by financial market participants (FMPs)&nbsp;when disclosing sustainability-related information under the Sustainable Finance Disclosure&nbsp;Regulation (SFDR). Five separate Annexes were also adopted.

The European Commission adopts the regulatory technical standards for the SFDR.

The Long Anticipated Disclosure Rules on Sustainable Investments are Here

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<h6>Whilst recent developments in digitalisation are unlikely to represent the end of asset management models as we currently know them, investing in digitalisation is becoming essential to ensuring that your business maintains its market leading position in an industry where digitalisation using artificial &nbsp;intelligence (AI), once a nice to have, may soon be indispensable.</h6>
<h6>This opening statement sits rather neatly within our series of articles &lsquo;Transformation is &nbsp;Inevitable&rsquo;, as nowhere is this truer than around digitalisation, which is increasingly being powered by transformative technologies such as AI.</h6>

How transformative technologies such as AI are powering digitalisation.

Transformation is Inevitable - AI for Asset Managers 

DORA sets uniform requirements for the security of network and information systems of companies and organisations operating in the financial sector as well as critical third parties which provide Information Communication Technology (ICT)-related services to them, such as cloud platforms or data analytics services.
&nbsp;
DORA creates a regulatory framework on digital operational resilience whereby all firms need to make sure they can withstand, respond to and recover from all types of ICT-related disruptions and threats. These requirements are homogenous across all EU member states. The core aim is to prevent and mitigate cyber threats.

The Digital Operational Resilience Act (DORA) and the DORA Amending Directive entered into force on 16 January 2023 and will apply from 17 January 2025. 

DORA: The EU’S New Regulatory Framework on Digital Operational Resilience

On 10 February 2023, the UK&rsquo;s Financial Conduct Authority (FCA) published a Discussion Paper: &lsquo;Finance for positive sustainable change: governance, incentives and competence in regulated firms&rsquo; (DP23/1). 
&nbsp;
In DP23/1, the FCA states that it believes that good governance and a healthy culture is critical to financial services firms&rsquo; being able to deliver value to clients and consumers, as well as supporting market integrity.
&nbsp;
The FCA notes that the aim of DP23/1 is to encourage an industry-wide dialogue on firms&rsquo; sustainability-related governance, incentives, and competencies.
&nbsp;
In DP23/1, the FCA highlights that certain firms have already integrated material sustainability-related risks, opportunities and, in certain cases, impacts into their business, risk and capital allocation decisions.

On 10 February 2023, the UK’s Financial Conduct Authority (FCA) published a Discussion Paper: ‘Finance for positive sustainable change: governance, incentives and competence in regulated firms’ (DP23/1).   

UK FCA Publish Discussion Paper on Finance for Positive Sustainable Change

On 13 March 2023 the Central Bank of Ireland (Central Bank) published Consultation Paper 153 &mdash; Enhanced Governance, Performance and Accountability in Financial Services (CP153), which consults on key aspects of the implementation of the Individual Accountability Framework (IAF), including the publication of draft Regulations and Guidance.
&nbsp;
In addition to the IAF, the draft Regulations and Guidance seek to provide clarity in terms of the Central Bank&rsquo;s expectations for the implementation of three aspects of the IAF: the Senior Executive Accountability Regime (SEAR), the Conduct Standards and certain aspects of the enhancements to the Fitness &amp; Probity Regime.
&nbsp;
CP153 follows on from the enactment of the Central Bank&rsquo;s IAF Bill 20224, which was signed into law on 9 March 2023 by the President of Ireland and became the Central Bank IAF Act 2023.

Central Bank Consults on Implementation of the Individual Accountability Framework

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Welcome to the latest article in our &lsquo;Transformation is Inevitable&rsquo; series, where we provide insights based on our on-going analysis of the complex, changing and ambitious regulatory policy environment, evolving customer needs, as well as advancing technology.
&nbsp;
In earlier articles we looked at the future of work and sustainable finance, the potential risks arising from the increasing use of cloud outsourcing and how regulators adjusted their agendas to tackle the impact of COVID-19 on financial services, amongst others.
&nbsp;
In this article, we consider the key regulatory themes to watch out for in 2023 and beyond. Certain themes will be familiar, whilst others may only just be entering the peripheral scope for the asset management industry.
&nbsp;

In this series, we provide insights based on our on-going analysis of the complex, changing and ambitious regulatory policy environment, evolving customer needs, as well as advancing technology.

Transformation is Inevitable – Key Themes for Asset Managers in 2023 and Beyond

The Strategy sets out the next steps on transition planning and the UK Green Taxonomy, to ensure that green finance markets are robust. The Strategy also sets out how the UK Government is working with a range of public financing bodies to commercialise and finance green technologies.
&nbsp;
The Strategy also incorporates both nature and climate adaptation into the UK&rsquo;s green finance framework. It highlights the fact that a new nature markets framework has also been published, which explains how the UK aims to develop high-integrity markets, enabling farmers and land managers to attract investment into natural capital.
&nbsp;
Finally, the Strategy sets out how the UK Government aims to accelerate the shift to a green global financial system and catalyse green financing globally.

Published on 30 March 2023, the 2023 Green Finance Strategy (the Strategy) represents the latest policy document developed by HM Treasury, the new Department for Energy and Security and Net Zero, and the Department for Environment, Food and Rural Affairs.

Mobilising Green Investment - the UK Government’s 2023 Green Finance Strategy

In February 2023, the UK became one of the latest jurisdictions to set out plans to regulate cryptoassets and pave the way for a central bank digital currency.
&nbsp;
As with other jurisdictions, the aim is to regulate the use of disruptive technologies, thereby ensuring that new products fit into the current regulatory framework.
&nbsp;
This is a rapidly developing arena. Indeed, between writing this article and its publication, further rules and guidance have been issued by IOSCO, the SFC, and the International Institute for the Unification of Private Law.

Joining jurisdictions around the world, the UK has recognised that disrupting technologies and failures in the cryptoasset arena have highlighted the need for regulation, not just to protect investors and maintain financial stability, but also to recognise the changes technology has made to the financial services sector. 

Digital Assets: The Evolving Regulatory Environment

The EC request also sought input on the definition of greenwashing in the financial sector, on the risks greenwashing can pose to investors and financial markets, on the implementation of sustainable finance policies aimed at preventing greenwashing, as well as on potential improvements to the regulatory framework.
&nbsp;
Following feedback received from the 2022 request for input, the EBA, EIOPA and ESMA published their respective Progress Reports on Greenwashing on the Financial Sector (the Reports) on 1 June 2023.
&nbsp;
The purpose of the Reports is to support a better understanding of greenwashing and to assess which areas of the sustainable investment value chain are more exposed to greenwashing risks.

In May 2022, the European Commission (EC) issued a “Request for input related to greenwashing risks and the supervision of sustainable finance policies” to three European Supervisory Authorities (EBA, EIOPA and ESMA - the ESAs).

ESMA Published its Progress Report on Greenwashing

<div>On 13 June 2023, the European Commission (EC) published the Sustainable Finance Package (the Package).</div>
<div>&nbsp;</div>
<div>In the EC&rsquo;s view, the purpose of the Package is to ensure that the EU sustainable finance framework continues to support</div>
<div>companies and the financial sector, while encouraging the private funding of transition projects and technologies.</div>

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As our premier thought leadership product, Citi Global Perspectives & Solutions (Citi GPS) is designed to help our clients navigate the global economy’s most demanding challenges, identify future themes and trends, and prosper in a fast-changing and interconnected world. 

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