ESG, DORA, and Retail Strategies: Duties For Independent Directors
Olivier Carré, PwC
A review of the risks surrounding key fund industry projects and where boards need to act, was given by Olivier Carré, a partner at PwC. Starting with the main ESG challenges, he also discussed the Digital Operational Resilience Act (DORA) and related regulations, as well as how new regulations are affecting retail strategies.

Adjusting to the ESG Challenge

Mr Carré said topics for urgent review include the upcoming updated SFDR template methodology by early 2025, as well as the need to keep website declarations in line with new disclosure standards, and to ensure that these are machine readable. He also recommended a review of methodology choices around sustainable investment definitions and Do No Serious Harm tests. Data management practices, including the use of proxies also need checking. ESMA fund naming guidelines are another coming challenge.
Business choices need to be made around these changes. Mr Carré spoke of the formalisation of third-party data sources, strategy around product and asset allocation, and the alignment of product strategy.

What DORA Business Choices?

The advent of DORA is being accompanied by regulatory action from the CSSF, by the Central Bank of Ireland, the US Federal Reserve and more. Mr Carré suggested DORA will have high-to-medium complexity and scope depending on each organisation’s size, the relative complexity of operations, whether operations are largely EU-based, the availability of IT resources, and so on.

“Now is the time to make an inventory of critical processes to define the scope of application and to initiate business choices from this,” he said. He added that a risk-based balance will need to be struck between business and operational needs compared to ICT/data requirements. This process is not always straightforward as it requires bridges to be built between different parts of each organisation, each of which tends to have a different outlook and way of talking. This inventory will also include third party providers.

As for the business choices downstream of this stock-taking exercise, these mainly concern the operational setup, including due diligence on supply chains and third-party providers. Decisions on the delegation of ICT functions to third parties and groups outside the EU could be somewhat complex. “The group could either ring fence an infrastructure setup and apply European standards, or goldplate the entire operations to make them all DORA compliant,” he said.

Changing Retail Market

The proposed retail investment strategy (RIS) omnibus directive is currently passing through the EU’s law-making system. This, AIFMD II and Eltif 2.0 all have implications for how asset managers approach non-professional investors, with high potential impact on stakeholders. 
Mr Carré pointed to some of the challenges, particularly the new “best interest test” within the RIS. This will apply tests to ensure that the products suggested are suitable for each investor and represent value for money. “Although there is nothing really new, there will be increased regulatory scrutiny,” he said, noting that it replaces the “quality enhancements” for MiFID 2 and the “no detriment” test in the IDD.

After taking stock, he suggested that asset managers benchmark their products, and redefine strategies for the fund range. Part of this work will be to understand costs, and to what extent these can be controlled as part of the overall strategy.

Fund Governance in Europe - Luxembourg, Ireland and UK compared
Andrea Montresori, PwC | Jon Griffin, Non-Executive Director | Shiv Taneja, Fund Boards Council | Lisa Martensson, IFDA