ESG highest regulatory concern

ESG and sustainable finance constitute the top regulatory concern for financial services firms, said KPMG.

As per the firm’s first Regulatory Barometer, ESG and sustainable finance, due to the volume of new and developing initiatives as well as challenging implementation, cause the most pressure amongst regulatory initiatives.

Rob Smith, partner and UK head of financial services regulatory and risk advisory at KPMG in the UK said in a statement: “Sustainability has rightly been at the top of the regulatory agenda for some time as wider ESG concerns are the issues of most discussed by regulators, industry and investors around the world, spurred on by the common understanding of finance’s role in reaching net zero. That trend is clear from our study as sustainability finance scored well above any of the other regulatory themes, even well-established areas such as financial resilience and the fast emerging world of digital finance.”

“On the ground, we are seeing more commitments to reaching net zero diving change in financial services as stakeholders and investors demand greater transparency. Focus is also increasing in areas such as nature and biodiversity, the circular economy and broader social impacts and the ‘just transition’. The scope of regulatory rules, frameworks, standards, taxonomies and other guidance is wide ranging and increasing, covering initiatives from corporate reporting to prudential disclosures and transition planes, risk frameworks and stress testing to ratings and data,” he added.

Scorecard
KPMG’s first regulatory barometer impact scores looked as follows:

Delivering sustainable finance / ESG         8.9

Maintaining financial resilience                 7.7

Regulating digital finance                         7.1

Strengthening operational resilience         7.1

Developing financial infrastructure           6.9

Enhancing customer protection                 6.6

Reviewing capital markets                        6.4

Redrawing the EU-UK border                     6.4

Reinforcing governance expectations         5.3

Average                                                    6.9

A higher score is linked with a greater need for oversight and regulatory resources, said KPMG, with a rating of over five classified as ‘significant’.

Designed to inform about the nine topics scoring the highest, the above are not set in stone but subject to change as the regulatory landscape evolves.

The barometer also goes further into detail on each issue. “If we take ESG as an example, it is still relatively new and evolving at a rapid pace,” said Smith. “It includes climate risk and financial risks associated with it, product labelling and standards, carbon footprints, so there’s a whole host of underpinning elements. You can drill down in the barometer itself to see some of the specifics, requirements, and associated timings.”

How we got here
To collate the data, the firm used a solution developed in-house, called the ‘Regulatory Horizon’ tool. Over the course of six months, it scanned the news feeds, publications, and other communications material from regulatory and supervisory bodies.

KPMG subsequently organised and analysed this data by going through an exercise of filtering and tagging, assessing it on: volume; overall complexity; and complexity of internal implementation.

The goal is to provide a source of consolidated regulatory intelligence combined with data-driven analysis.

“The Regulatory Barometer is meant to take away some of the burden our clients are bearing when assessing the level of complexity a regulatory update has, freeing up their time from going through all these publications. A lot of the requirements have quite a short timeline for implementation, so these three levers for assessment are therefore key in order to allow them to be proactive and compliant,” commented Smith.

Additionally, indicators of maturity show progression in each area of regulation as well as a possible divergence on EU and UK legislative levels.

The next edition will be published in Q1 2023 and every six months thereafter.