How to incorporate ESG into your compliance strategy

by James · August 30, 2022

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

Over the past few years, ESG has secured a place at the table of the biggest discussion topics in the financial industry – with the industry in step 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 embedding a long-term ESG strategy in your business? According to Clausematch, some of the key benefits include being more attractive to investors, having a stronger performance, better financial indicators, greater adaptability, improved preparedness for upcoming regulations and being able to promote and enhance a positive brand image.

While the environmental aspect of ESG receives by far the most focus, Clausematch believes that the social and governance aspects are almost forgotten, despite the fact that both areas are areas with potentially greater risk.

Clausematch said: “Many companies seem to feel that they need to implement an ESG strategy just for compliance purposes, that they are expected to do so or that it is ‘the right thing to do’. This is only 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 listed firms, regulation plays an increasingly important role. The London Stock Exchange, for example, recently issued guidance for all issuers on ESG reporting – from the characteristics of ESG data and key reporting standards, to how to navigate and communicate regulation and the new standards in debt finance.

Clausematch noted that whether or not you are required by law 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 ones you already have been tracked or included in your financial figures.

The firm continued, “The confusion remains around 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 every company and industry is different and therefore must internally define what is important to them from an ESG standpoint.ESG reporting is not just a cost of doing business, it will have a lasting impact, so it should be carefully considered.

In Clausematch’s opinion, companies need to decide what they believe and what matters to them, and believe that they should ask themselves how they can go about defining ESG, how they should actually define ESG, what it means to them and how it fit into their strategy.

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

What can companies do to make ESG compliance easier? Clausematch said: “It’s inevitable that technology and the time-saving automation it can provide will be part of your strategy. For those tasks that may only need to be done once a year, technology may not be the answer. But when you track more metrics are integrated into a company’s KPIs, automation is essential – what gets measured gets done and holds individuals accountable for delivery.”

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

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

Despite this, companies should not become too dependent on technology. The business said in its e-book, “Compliance leaders should embrace technology but also 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 production, but only if all users understand how to use it meaningfully and while monitoring, ensure that the numbers and results you get from it are in line with your expectations.”

Clausematch said those considering RegTech, with regard to ESG, should consider areas such as connectedness, transition risk and collaboration. On the latter point, the firm said: “The issues facing businesses, on a global scale, are enormous. If we are to understand the issues facing both organizations and individuals, as well as fully understand where we need to get to with an orderly transition, then there must be strong collaboration between all parties. This will not be easy, especially when large data providers try to lock companies into their systems and solutions early on.”

How can industry prepare from decarbonisation to policy management?

Clausematch concluded: “Taking a bottom-up approach to policy-making is key to moving the needle on decarbonisation. In this regard, companies need to collaborate and work together, even starting and joining consortia in a team effort to lead COP26

“Making a targeted response to the problems of decarbonisation, all the way to policy management, is also important. So, don’t make the mistake of rushing the technology through and not being aware of the by-products and consequences, because in trying to fix the climate, we don’t want to break anything else.

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

Read the entire e-book here.