Environmental, Social, and Governance (ESG) is increasingly becoming a major talking point for financial institutions, but what does it mean for them?
ESG is increasingly being brought into regulations. One example of this is the update to MiFID II later this year, which will require asset managers to include sustainability factors, risks and preferences in sustainability assessments. Diligent, a provider of governance, risk and compliance tools, recently explored what ESG means for businesses.
It stated that the regulation is often dominated by the environmental concerns, but there are more challenges to conquer than carbon footprints, such as social issues like modern slavery.
Another challenge firms must navigate with ESG is how regulations work, with requirements ranging from voluntary to mandated, it said. For example, regulations like the Clean Air Act and Equal Pay Act are mandatory, while ESG disclosures are not part of an active regulation, but are becoming increasingly popular, especially as consumers and businesses take more interest in their own ESG footprints.
There are growing risks for failures to meet ESG compliance. There are financial, repetitional and commercial damages to be considered. Diligent added that ESG ratings and scores are becoming more popular, which is increasing the impacts of ignoring ESG.
Similarly, those ignoring ESG principles could struggle to hire talent, it said. A recent report from AON found that 44% of STEM millennials and Generation Z are interested in careers in oil and gas, compared to 77% in the technology sector.
Similarly, consumers are increasingly avoiding companies deemed unethical, with Diligent claiming 64% of US consumers taking ethical performance into account when buying products.
Diligent outlined six key areas compliance teams need to focus on in relation to ESG. The first is the scope their ESG compliance needs to cover. Second is the prioritisation of the challenges, which might be influenced by the level of regulations, important issues to solve quickly or countless other factors. It also added this might need an ESG compliance checklist to ensure all areas are captured when building strategies.
The third area is understanding obligations, industry best practice and regulatory imperatives. Next is familiarising the team with frameworks set out by bodies such as SASB, GRI, TCFD, CDP and the WEF.
Another area to focus on is how ESG data can be collected and effectively monitored. Finally, Diligent said teams need to establish who is responsible for implementing and overseeing progress made with ESG compliance strategies.
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