ASK MAT:- how do I integrate material SUSTAINABILITY-RELATED RISKS into my Jersey business operations of 10 employees

ASK MAT:- how do I integrate material SUSTAINABILITY-RELATED RISKS into my Jersey business operations of 10 employees

MAT SAYS: This is a great question, and I presume you are asking because the JFSC is proposing (subject to consultation) that regulated Jersey firms integrate material SUSTAINABILITY-RELATED RISKS, opportunities, and impacts into their business operations, including but not limited to Business Model, strategy, and risk assessment. 

To start, answering your question, I wish to point out that unfortunately, there is little guidance on these matters now, and the JFSC only intends to issue guidance after the consultation and once adopted in the codes.

Source

• https://www.jerseyfsc.org/media/8238/consultation-on-proposals-regarding-sustainable-finance.pdf

Although the JFSC will not issue any guidance until after the consultation and implementation of the new rules, I can offer the following thoughts on your question.

• As a small financial services business with 10 employees, integrating material sustainability-related risks, opportunities, and impacts into your operations is achievable with a focused, practical approach.
• Given your size, you should be able to prioritise high-impact actions that align with your business model, strategy, and risk assessment without requiring extensive resources.

As a starter, you may wish to read Comsure's thoughts on sustainability here:

• https://www.comsuregroup.com/news/sustainability-related-risks-is-your-jfsc-ewra-bra-ready/
• https://www.comsuregroup.com/news/identification-and-mitigation-of-esg-sustainability-related-risks-is-new-for-many-management-teams-however-help-is-available/
• https://www.comsuregroup.com/news/ask-mat-in-jersey-what-does-sustainable-finance-mean/
• https://www.comsuregroup.com/news/a-jfsc-sustainable-finance-consultation-on-enhancements-to-the-codes-of-practice-cop-and-notes-has-been-issued/

Also, I’ll highlight sustainability-related risks specific to your industry below and provide a streamlined guide to effectively integrate these considerations.

What are the sustainability-related risks for a small financial services business?

1. Sustainability-related risks in financial services typically involve
1. Environmental, social, and governance (ESG) factors
2. That could impact your operations, client relationships, regulatory compliance, or reputation.
2. For a small firm, these might include:
1. Environmental Risks:

1. 1. • Physical Risks: Climate-related events (e.g., floods, storms) can disrupt office operations or affect clients’ investments (e.g., real estate portfolios impacted by climate damage).
      • Transition Risks: Regulatory changes, such as stricter ESG disclosure requirements or carbon taxes, could increase compliance costs or affect investment portfolios.

1. 1. 1. 1. For example,
            1. New rules like the EU’s Sustainable Finance Disclosure Regulation (SFDR) could require you to report on the sustainability of your financial products.
            2. https://finance.ec.europa.eu/regulation-and-supervision/financial-services-legislation/implementing-and-delegated-acts/sustainable-finance-disclosures-regulation_en#:~:text=The%20Sustainable%20Finance%20Disclosures%20Regulation%20%28SFDR%29%20empowers%20the,with%20the%20obligations%20laid%20down%20in%20the%20directive.
   2. Social Risks:
      • Risks related to client trust, employee well-being, or diversity. For instance,

1. 2. 1. 1. Failing to address client demands for sustainable investment options could lead to lost business.
         2. Poor workplace practices (e.g., lack of diversity or inadequate employee support) could harm retention or reputation.
   3. Governance Risks:
      • Non-compliance with emerging ESG regulations or inadequate transparency in client communications could lead to fines or reputational damage.
      • For example,

1. Misrepresenting the sustainability of investment products (greenwashing) could erode client trust.

How to Integrate Material Sustainability-Related Risks, Opportunities, and Impacts

Here’s a tailored, step-by-step approach for your small financial services business to integrate sustainability into your business model, strategy, and risk assessment, focusing on practicality and efficiency.

1. Identify Material Sustainability Issues

• Conduct a Simple Materiality Assessment:
• Engage key stakeholders (e.g., employees, clients, and regulators) to identify ESG issues most relevant to your business.
• This could be a brief survey or discussion with clients and staff for a small firm.
• Focus on industry-specific issues, such as:
• Environmental: Client demand for sustainable investments (e.g., green bonds, ESG funds).
• Social: Client trust, employee satisfaction, and diversity in hiring.
• Governance: Compliance with financial regulations and transparency in ESG reporting.
• Use frameworks like the Sustainability Accounting Standards Board (SASB) for financial services to guide you (available online for free).
• https://sasb.ifrs.org/find-your-industry/?industry%5B0%5D=FN-AC&industry%5B1%5D=FN-CF&industry%5B2%5D=FN-AC
• Example:
• Clients might prioritise investments aligned with climate goals, and employees value flexible work policies or diversity initiatives.

2. Integrate into the Business Model

• Offer Sustainable Financial Products:
• Incorporate ESG-focused investment options, such as funds screened for environmental or social criteria, to meet client demand. Partner with third-party providers (e.g., ESG fund managers) to offer these without building in-house expertise.
• Example:
• Offer clients a small selection of ESG mutual funds or green bonds.
• Green Your Operations:
• Reduce environmental impact by adopting paperless processes, using energy-efficient office equipment, or switching to renewable energy providers.
• Example:
• Use digital signatures and cloud-based systems to cut paper use.
• Engage Suppliers:
• Work with vendors (e.g., IT providers, office suppliers) that prioritise sustainability, such as those with low-carbon practices or ethical labour standards.
• Example:
• Choose a cloud provider with a commitment to renewable energy.

3. Embed into Strategy

• Set Achievable Sustainability Goals:
• Define 1-2 clear, measurable goals, such as reducing office energy use by 10% in two years or ensuring 50% of investment offerings include ESG options by 2027.
• Align with frameworks like the UN Principles for Responsible Investment (PRI), which many financial firms use to guide sustainable investing.
• https://www.investopedia.com/terms/u/un-principles-responsible-investment-pri.asp
• Incorporate into Client Relationships:
• Educate clients on sustainable investing options during consultations to build trust and meet their values.
• Example: Create a short guide explaining how ESG investments align with financial goals.
• Leadership Commitment:
• Assign a team member (e.g., a senior advisor or manager) to oversee sustainability efforts, given your small size. This person can dedicate a few hours weekly to monitor progress.
• Example:
• Train one employee to stay updated on ESG regulations and trends.

4. Incorporate into Risk Assessment

• Update Risk Management:
• Add sustainability risks to your existing risk register.
• For example,
• Include risks like regulatory non-compliance (e.g., failing to meet ESG disclosure rules) or reputational damage from offering non-sustainable investments.
• Use simple tools like a spreadsheet to track risks, their likelihood, and potential impact (e.g., financial penalties or client loss).
• Scenario Analysis:
• Assess how ESG risks could affect your business.
• For instance,
• Consider how a new regulation requiring ESG disclosures might increase compliance costs or how a client shift to sustainable investments could impact revenue.
• Example:
• Estimate costs of complying with SFDR or similar regulations and plan budget adjustments.
• Monitor and Report:
• Track key metrics, such as the percentage of ESG-aligned investments in your portfolio or office energy consumption.
• Share a brief annual update with clients (e.g., via email or a webpage) to demonstrate transparency.

5. Leverage Opportunities

• Attract Clients:
• Market your commitment to sustainability to differentiate from competitors. Highlight ESG investment options or your low-carbon office practices in marketing materials.
• Example: Add a “Sustainability Commitment” section to your website.
• Cost Savings:
• Reduce operational costs through energy efficiency or paperless processes.
• Example: Switching to LED lighting could save on electricity bills.
• Access Funding or Partnerships:
• Explore partnerships with ESG-focused fund providers or platforms that offer sustainable investment tools tailored for small firms.

6. Engage Stakeholders and Build Capacity

• Train Employees:
• Provide basic training on ESG principles, such as a one-hour workshop or free online courses (e.g., from Coursera or PRI Academy).
• Example:
• Train staff to discuss ESG options confidently with clients.
• Engage Clients:
• Ask clients about their sustainability preferences during onboarding or reviews to tailor offerings.
• Example: Include a question about interest in ESG investments in client intake forms.

7. Ensure Compliance and Transparency

• Stay Informed on Regulations:
• Monitor regulations relevant to financial services, such as SEC climate disclosure rules (U.S.) or SFDR (EU). For a small firm, subscribe to industry newsletters or join a trade association for updates.
• Example:
• Check resources from the Investment Adviser Association or PRI for regulatory guidance.
• Transparent Communication:
• Be honest with clients about the sustainability of your offerings to avoid greenwashing risks.
• Example:
• Disclose the ESG criteria used for any sustainable investment products.

Practical Example for Your Business

• Material Risk: Clients leave for competitors offering ESG-focused investments.
• Integration:
• Business Model: Partner with an ESG fund provider to offer clients a curated selection of sustainable investments.
• Strategy: Set a goal to have 30% of client portfolios in ESG-aligned investments by 2027 and promote this in client meetings.
• Risk Assessment: Track regulatory changes (e.g., SEC or SFDR rules) and estimate compliance costs (e.g., $5,000 annually for reporting tools). Mitigate client loss risk by surveying client ESG preferences annually.
• Opportunity: Attract younger or socially conscious clients by advertising your ESG offerings on your website and social media.

In closing you may wish top read more on these matters

• COSO
• Enterprise Risk Management: Applying enterprise risk management to environmental, social, and governance-related risks.
• https://www.ferma.eu/wp-content/uploads/2019/04/COSO-WBCSD-ESGERM_Executive_Summary.pdf
• PwC
• The ESG movement: Are you ready for the ESG revolution? https://www.pwc.com/us/en/services/esg/library/esg-revolution.html
• ESG oversight: The corporate director’s guide https://www.pwc.com/us/en/services/governance-insights-center/esg-guidebook-layout-final.pdf

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