Sustainability and ESG issues are a very interesting topic and one of the most prominent ones arising in the investment industry. The ESG abbreviation stands for Environmental, Social and Governance, which are quickly developing into a set of factors that investors increasingly use to screen potential investments. Environmental factors take into consideration the eco-friendly interests of a firm and the approach it follows in that respect. Specifically, in the case of investment entities, they take into consideration whether investments are made in assets that could be considered environmentally friendly. Social factors refer to the relationship of a firm with its various stakeholders i.e. suppliers, customers, investors, employees, and the community it operates in general. Governance refers to a number of factors including the leadership of a company and its processes and procedures in place such as internal controls and shareholding rights. As the importance of ESG within the investment community is expanding, the risk management function should be harmonized and be on top of the developments concerning ESG-related matters.

Regulations coming into place drive investors to sustainable investments. In addition, more and more investors are themselves inclined to invest sustainably. Global asset managers and regulated entities have started providing more and more options to investors to invest sustainably. As a result, investment advisors ought to be well educated and aware of ESG-related matters in order to advise, in a responsible manner, potential investors about the pros and cons of investing in ESG. Additionally, investment advisors must be in a position to understand investor needs and provide them with those solutions that are aligned to their ESG priorities. 

As it concerns risk management, the risk framework and the information concerning ESG of each individual fund must be taken into account. The risk manager from his/her side must be aware of the ESG investment strategy and objective of each fund. Having said that, ESG practices should be consolidated in the general investment philosophy of each regulated entity. Over and above, the risk manager should be in a position to identify and monitor the ESG risks that each regulated entity may face by utilizing the available risk management tools in his/her possession. To monitor ESG-related matters, the risk manager has to monitor compliance with the regulated entity’s investment objective plus:

• The processes and procedures in place and ensure ESG adherence;

• Whether senior management is aware of sustainability risks;

• Existence of appropriate understanding of ESG risks in order to mitigate them; and 

• Compliance with regulations concerning ESG matters.

Evaluating environmental, social and governance risks and the impact that those risks may have on a regulated entity will be an integral part of the risk management function going forward. As a case in point, the risk manager has to be aware when evaluating environmental risks whether a regulated entity invests implicitly or explicitly in assets that use, for instance, toxic chemicals or enhance water pollution. Moreover, regulatory authorities around the world are considering requesting regulated entities to report climate risks in an effort to provide consistency and comparability of data, while understanding how each entity is affected by these types of risks and to what extent. In an effort to monitor social factors, the risk manager must, as an example, be up to date with respect to the management of the workforce of the regulated entity and the degree of diversity that exists in the firm. As it concerns governance-related matters, the risk manager has to be in a position to monitor the practices followed by the board of directors with respect to the management of operations, decision making, legal and financial practices and the protection of stakeholders’ rights (employees and shareholders, as well as the society at large).

As ESG evolves, risk managers in Cyprus should remain informed and educated and ultimately be in a position to fulfill their daily tasks by fully complying with relevant laws and regulations as these relate to ESG matters. In parallel, competent authorities could organize seminars explaining the rising importance of ESG and important areas that risk managers should pay attention to in order to ensure the safety of investors and, at the same time, the safety of the environment.