Daragh Tracey discusses how financial institutions can automate ESG compliance and reap commercial success.
In a recent Fenergo survey of approximately 70 C-suite executives from some of the world’s largest financial institutions, 38% said they haven’t started implementing an operating model for ESG compliance processes and only 6% have completed implementation. These figures provide an alarming insight to banks’ readiness to comply with upcoming compulsory ESG regulations such as SFDR.
Lack of Standardization Stifling Success
Financial institutions around the world making long-term commitments to environmental and social goals are now obliged to attest that commitment to regulators. Yet in practice this task has its challenges.
In our survey the top three challenges with meeting ESG obligations include a lack of standardisation and data quality (39%), operationalising policy (30%) and regulatory complexity (20%). Standardization is a universal challenge, there are currently no common ESG scoring, reporting, and disclosure standards. Jurisdictions vary in their approach worldwide, so FIs with international reach need to understand their obligations in each jurisdiction and keep up with developments as they evolve. The lack of standardisation also further exasperates the challenges around data quality. With such a wide range of ESG rating systems in use across the world, there is a lack of consistency, and their accuracy depends on the quality of the data fed into them.
The knock-on effect of the aforementioned challenges creates a hostile environment for the smooth implementation of processes for ESG compliance. Yet there are many commercial benefits beyond the obvious such as reduced risk of reputational harm or regulatory enforcement action. So how can financial institutions get to grips with ESG and be primed for success?
- Synergies that exist between AML/KYC data and processes mean FIs can easily absorb ESG into existing Client Lifecycle Management (CLM) frameworks
- As a starting point, much data can be re-used from KYC to jumpstart ESG, including nature of business, industry codes and even the board of directors
- Leverage major ESG data providers, such as S&P Global, to enrich client and supply chain profiles as much as possible through Application Programmer Interfaces (APIs)
- It is crucial to ensure ESG and KYC/financial crime are not siloed. Leverage people, data and resources to create integrated reporting structures that centralize the entity in the process, whether we’re looking at them from an ESG or KYC lens
- Use proprietary rating methodologies to automatically rate and classify the client, escalating to specialist “ESG-Regulatory Officer” type roles for exceptional cases
- The automation and re-purposing of data, coupled with the leveraging of CLM operating models, deliver significant operational efficiencies and cost savings