Are firms prepared for greater ESG regulatory requirements?
It is now rare for a week to pass without at least one regulator issuing new guidance or updates related to environmental, social, and governance (ESG).
For instance, the UK’s Financial Conduct Authority (FCA) has just introduced temporary measures for firms involved in sustainable investment as part of its broader SDR and investment labels regime. The changes give temporary flexibility to the anti-greenwashing rule. Last week, the Australian Prudential Regulation Authority (APRA) introduced a new directive, including a Climate Vulnerability Assessment (CVA). This assessment will analyse the impact of climatic changes on the affordability of household insurance, studying major insurers that dominate about 80% of the market through 2050.
Updates to ESG regulations are becoming a frequent challenge for compliance teams within financial services firms. With this, they need to become better prepared at keeping up with changes and ensure they meet compliance.
In a statement from Position Green, it believes that many firms are not currently prepared for the rapidly changing landscape of ESG regulations. They said, “74% of financial services firms are investing in new technologies to enhance ESG data management and reporting.
“The shift from voluntary to mandatory reporting may be catching some companies off guard, particularly those without robust ESG strategies, though. So, companies need to prioritize building capabilities for ESG data collection, risk management, and regulatory compliance to avoid falling behind.”
Increased ESG disclosure requirements
One area of ESG regulation that has increased pressures on compliance teams is greater ESG disclosure requirements. The Corporate Sustainability Reporting Directive (CSRD), which launched earlier this year, is one of the regulations to put greater emphasis on ESG disclosure. Under the regulation, companies, banks and insurers are required to disclose their sustainability information.
It is not just the EU that is increasing requirements related to ESG disclosure. The US’ Securities and Exchange Commission (SEC) established climate reporting rules in March that mandate U.S. public companies to disclose the climate risks facing their businesses, strategies to mitigate these risks, the financial impacts of severe weather events, and their greenhouse gas (GHG) emissions. The new requirement has faced some pushback, but the regulator is eager to defend its changes.
With a greater pressure on ESG disclosure, how can firms cope. Position Green believes the best way to do this is through enhanced data management. They said, “Financial services firms are coping with increased ESG disclosure requirements by enhancing their data management systems, investing in technology to automate reporting processes, and adopting a more integrated approach to ESG strategy. The implementation of cross-functional ESG teams is becoming increasingly important to ensure that all aspects of the business are aligned with regulatory demands and stakeholder expectations.”
The cross-functional ESG team
As firms face increasing ESG requirements across various operations and teams, compliance workflows can easily become inefficient. With siloed teams, two teams could separately collect similar information to create their ESG report. This not only creates more workloads for teams but could also cause inconsistencies. By having a cross-functional ESG team, the firm is better placed to manage their responsibilities by ensuring data collection, risk management and strategy is coordinated across all departments.
Position Green explained, “Companies with cross-functional ESG teams are 2.5 times more likely to achieve their sustainability goals, though, so it is crucial that they seek solutions based around interoperability and compatibility to make their data as transferable and accessible as possible.
“This will help to bridge the gap between operations, finance, HR, marketing, and executive leadership, making it easier to meet complex ESG reporting requirements and drive sustainability initiatives.”
As to how a firm can build an effective cross-functional ESG team, Position Green explained, “To build an effective ESG team, firms should focus on recruiting individuals with diverse skill sets, including expertise in sustainability, finance, data analytics, and regulatory compliance.
“It’s important to foster a culture of collaboration and continuous learning, where team members are empowered to innovate and drive ESG performance. Moreover, clear communication and alignment of ESG goals with the company’s overall strategy and the board are essential for the team’s success.”
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