How to incorporate ESG into your compliance strategy


A recent eBook by RegTech firm Clausematch has delved deeper into the question of how companies can best incorporate ESG practices into their compliance programs.

Over the last few years, ESG has secured itself a seat at the table of the biggest discussion topics in the financial services industry – with the industry moving with the times. For example, it was recently found that 60% of assets managed for EU investors now incorporate sustainable investment strategies.

What are some of the benefits of embedded a long-term ESG strategy into your company? According to Clausematch, some of the key benefits include being more attractive to investors, having a stronger performance, better financial indicators, greater adaptability, improved readiness for upcoming regulations and being able to promote and enhance a positive brand image.

While the environmental aspect of ESG gets by far the most focus, Clausematch believes the social and governance aspects have almost been forgotten, despite both areas being areas of potentially greater risk.

Clausematch said, “Many companies appear to feel that they need to implement an ESG strategy simply for compliance purposes, that they’re expected to do it or that it’s ‘the right thing to do’. This is just part of the picture, because implementing a true ESG strategy is so much more than just reporting numbers to investors or the public – a well thought out and embedded ESG strategy can be used as a competitive advantage.”

The company noted that for publicly traded firms, regulatory is playing an increasingly important role. The London Stock Exchange, for example, recently released guidance for all issuers on ESG reporting – from the characteristics of ESG data and the key reporting standards, to how to navigate and communicate regulation and the emerging standards in debt finance.

Clausematch remarked that whether you are required by law or not to disclose specific ESG data, ‘getting it right from the start is key’, stating that many of the data metrics that you may be required to report may not be those that you have already tracked or included in your financial numbers.

The firm continued, “Confusion remains on the right metrics that need to be measured and tracked, which is part of the reason why so many companies are still sitting back and waiting for more guidance.  We believe that all companies and industries are different and therefore need to internally define what is important to them from an ESG standpoint. ESG reporting is not simply a cost of doing business; it will have a lasting impact, so it should be considered carefully.

In the opinion of Clausematch, companies need to decide what they believe and what matters to them, believing they should ask themselves how they can go about defining ESG, how they are actually going to define ESG, what does it mean to them and how does it fit into their strategy.

Clausematch added that companies that think about the five P’s of sustainable development inside their business. These include people, profit, planet, purpose and principles. It said, “With the likelihood of increased regulation surrounding ESG for all businesses over the coming years, doing a thorough and well thought out review now will position you in good stead for the future.”

What can businesses do to make ESG compliance simpler? Clausematch said, “It’s inevitable that technology and the timesaving automation that it can provide will form part of your strategy. For those tasks that may only need to be completed once a year, technology may not be the answer. But when tracking multiple metrics that are incorporated into a company’s KPIs, automation is crucial – what gets measured, gets done and makes individuals accountable for its delivery.”

Once it is understood what a business stands for and how ESG fits into its strategy, there are other moving parts that need to be dealt with. This includes communicating your new ESG policies internally and externally and keeping track and maintaining good reporting standards and measure performance. These last two areas will be tough, Clausematch claims, unless you have the right regulatory technology in place.

In the opinion of Clausematch, companies should consider redesigning their company’s strategy from the ground up to be ESG-friendly by default – something the firm claims will mean less compliance hurdles later. In addition, with RegTech also incorporated into their systems, tracking and management of future necessary business developments and regulation will be enhanced.

Despite this, firms should not become too reliant on technology. The business said in its eBook, “Compliance leaders should embrace technology but at the same time understand its limits. Technology can help you make better decisions, but you still need to make those decisions. Technology can help streamline your business and improve output, but only if all users understand how to use it meaningfully and while monitoring, ensure the numbers and results you receive from it are in line with your expectations.”

Clausematch said that those evaluating RegTech, with regard to ESG, should consider areas such as connectedness, transition risk and collaboration. In the latter point, the firm said, “The problems firms face, on a global scale, are huge. If we are going to make sense of the issues that both organizations and individuals face, as well as fully understand where we need to get to with an orderly transition, then there needs to be strong collaboration amongst all parties. This won’t be easy, especially when major data providers are attempting to lock firms into their systems and solutions early.”

How can the industry prepare from decarbonization to policy management?

Clausematch concluded, “Taking a bottom-up approach to policy-setting is key to driving the needle on decarbonization. In this regard, companies need to collaborate and work together, even starting and joining consortiums in a team effort to lead COP26

“Taking a measured response to the problems of decarbonization, all the way through to policy management, is also important. So, don’t make the mistake of rushing technology through and not being aware of its byproducts and consequences, because in attempting to fix the climate, we don’t want to break something else.

“And this is where RegTech can play a fundamental role, ensuring that there’s consistency between how companies set their policies, but also consistency from the regulators who need to understand how to minimize unwanted byproducts.”

Read the full eBook here.

Copyright © 2022 FinTech Global

Enjoying the stories?

Subscribe to our daily FinTech newsletter and get the latest industry news & research


The following investor(s) were tagged in this article.