Exploring Compliance and Sustainability Integration: A Focus on Financial Intermediaries' Internal Control Functions

In a context where sustainability has become a fundamental concept, Environmental, Social and Governance (hereinafter also “ESG”) factors are increasingly gaining relevance for financial intermediaries. Current regulations require these entities to integrate ESG factors into their strategic planning processes, management activities - such as Risk Appetite Framework (hereinafter also “RAF”), Internal Capital Adequacy Assessment Process (hereinafter also “ICAAP”), and Internal Liquidity Adequacy Assessment Process (hereinafter also “ILAAP”), as well as into their internal control systems and recovery plans. Consequently, all internal control functions must operate synergistically and can contribute to enhancing the sustainability of the intermediary and its operations by clearly defining roles and responsibilities. In this context, the “Compliance function” assumes a central role. This is because it plays a proactive role aimed at assessing compliance with regulations while also ensuring the integration of ESG factors within processes and verifying their proper incorporation through “ex-ante” activities - such as translating legislative prevision into “soft law” (i.e. policies and operational strategies) - and “ex-post” activities, for instance compliance audits. Thus, adopting a forward-looking perspective that considers the long-term impacts of ESG factors is essential. In this regard, the current chapter is structured as follows: (i) the first paragraph focuses on analyzing how ESG factors are integrated within the internal control systems of financial intermediaries, with an emphasis on first and third-level controls; (ii) the second paragraph examines the integration of sustainability into second-level functions, particularly focusing on how the Compliance function can address ESG issues and its relationship with Risk Management; (iii) finally, the third paragraph will emphasize the monitoring of ESG indicators by the Compliance function, including the integration of such indicators into recovery plans and other best practices.