From new entries in compliance to protagonists: the rise of ESG goals in finance


From environmental to social issues, the ESG regulatory area is the queen of compliance

As we write in a recent blog post, 2023 is the year of financial compliance, also due to documents related to the ESG regulatory area, which represents a major contributor. Indeed, Environmental, Social and Governance objectives are now at the center of regulators’ thoughts, given the urgency of responding to the climate and energy crisis, as well as the challenges generated by a rapidly changing social and technological context. This is why ESG issues are increasingly protagonists in regulatory updates. Some numbers? According to a CUBE’s report, referring to the past 10 years on a global scale, the occurrences of the acronym “ESG” within regulatory issuances have already been about 3.500, while the 95,3% of the documents issued have referred to the expression “climate change risk”. Moreover, in this context, the European Union is at the forefront, as it has issued 47,22% of the world's regulatory updates on environmental issues, in respect to 23,47% in Asia and 22,9% in North America. In short, the EU leads a regulatory trend in which the ESG area is becoming the queen of compliance and is expected to grow further, both in terms of quantity and relevance of the updates issued by regulators.

Here's where to find ESG guidelines: discovering the European regulatory perimeter

The acronym ESG has thus become a buzzword used daily by financial compliance specialists. In fact, as the numbers just mentioned testify, updates pertaining to the ESG regulatory area in the banking sector are increasingly frequent and relevant for financial institutions around the world. The European regulatory perimeter when it comes to ESG objectives includes, among others, EU Regulation 2019/2088 (the so-called SFDR, Sustainable Finance Disclosure Regulation), EU Regulation 2020/852, the Proposed European Green Bond Regulation, and other documents that put sustainable finance at the center. But the European Commission is constantly working to implement legislation on ESG issues that can keep up with the needs related to the need to regulate both civil society and, more specifically, also all companies that offer financial products related to this regulatory area. Indeed, the aim of European financial authorities is to implement the so-called “European Green Deal”, which is the continental industrial plan aimed at improving the competitiveness of the European zero-emission industry and supporting the rapid transition to climate neutrality.

ESG legislation and regulatory updates: the latest regulatory news and outlook for 2023

As anticipated a few lines ago, the end of 2022 and the beginning of 2023 have confirmed the growing trend of the regulatory perimeter related to ESG objectives. Some examples? At the national level, at the end of 2022, the Bank of Italy published a document related to ESG factors for Italian banks. In addition, on 21 January 2023, the Decree N. 209 of October 4, 2022 by the Ministry of Economy and Finance was published in the Official Gazette, then coming into force on 5 February 2023, establishing the new requirements for banking operators to qualify as ethical and sustainable finance bank operators, in order to benefit from the aid provided by Article 111-bis of the TUB (the Testo Unico Bancario, namely the Consolidated Banking Act), as well as the procedures for being able to proceed with the application and recognition of the tax relief. But that's not all. On 1 February 2023, the European Commission sent out for consultation to the states a proposal to transform the State Aid Temporary Framework into a Temporary Crisis and Transition Framework to facilitate Europe's green transition. In a nutshell, this proposal aims to provide quicker access to finance for companies operating in the EU, thus stimulating investment in renewable energy to help decarbonize industry and produce the equipment needed for the zero-impact transition envisioned by the European Green Deal.

How to calculate the impact of ESG on business? With appropriate RegTech solutions... like Daitomic

This not exhaustive list of interventions by European and national regulators related to ESG objectives is already enough to express how much this regulatory area is increasingly playing a leading role in the financial sector. And, consequently, how much effort it requires from Risk Management professionals to stay up to date with all the regulatory changes and assess their compliance impact, on one hand, but also from professionals specialized in Product Governance, with respect to business and financial product development, on the other hand. To carry out these tasks accurately and as fast as possible, financial institutions need RegTech tools that provide the only information they need to make the right ESG decisions. But how can this be achieved? In Aptus.AI we have found the answer, based on the automation of the financial compliance processes steps where the decision-making ability of humans is not needed, namely those of so-called “regulatory alerting”. Daitomic, our RegTech SaaS, already performs this task exploiting its AI-powered machine readable format for financial regulations, which allow it to automatically extract regulatory requirements and obligations, also taking into account internal processes and policies. This automated analysis through Artificial Intelligence engines - which have also recently been integrated with Generative AI tools - offers real-time first-impact analysis even on ever-changing regulatory perimeters, just like the just described ESG one or also like the one related to PRIIPs. In the multi-regulatory and cross-country context of the European Union, Aptus.AI’s proprietary AI technology underlying Daitomic enables not only to reduce time and costs of transposing financial regulatory updates, but also to analyze draft documents, offering for the first time the possibility of anticipating regulatory trends from a business-centered perspective.