How your compliance team can prepare for ESG developments

Some banks may prefer to have a collaborative approach to ESG conditionality.

By Tahmina Day

Jhe first half of 2022 was saturated with significant developments in the ESG area. Among these are the climate disclosure rules proposed by the SEC. The SEC has also been vocal in expressing no tolerance for so-called greenwashing. The regulator expects public companies to provide better scrutiny of any voluntary disclosures and claims about their ESG practices to avoid unsubstantiated claims.

With these developments underway, banks already practicing climate and ESG disclosure, and those embarking on this path, may soon be embarking on a new path: compliance with climate disclosure regulations.

While the execution of any approved disclosure rule is unique to each bank and will most likely be the responsibility of cross-functional teams, one function in particular takes center stage: compliance. What will climate disclosure requirements mean for your bank’s compliance department? As busy as your compliance team already is, the climate disclosure proposal may soon expand that team’s reach by adding new responsibilities and requiring an effective approach to managing the associated compliance risks.

As the SEC’s Climate Disclosure Proposal is being finalized, now is the time to assess your readiness. What can compliance leaders do now to set their teams up for success? Here are three distinct steps compliance professionals can take today for better results tomorrow.

1. Build a foundation

If your compliance team hasn’t been tracking the latest ESG and climate information updates, now is a good time to engage them. Getting familiar with the proposed rules and some of the underlying frameworks, such as the TCFD and the GHG Protocol, is the first step.

Then, it is important to answer two fundamental questions:

Who will be involved? Each bank has its own compliance organizational structure. Reviewing a compliance matrix will help understand which group or team within compliance is best placed to engage with climate disclosure rules. While some banks might be well placed to have a dedicated role or even a team, others may prefer to have a collaborative approach to cross-compliance with representation from the compliance, regulatory and internal compliance teams of the BOW.

And do you have enough knowledge and expertise? The world of ESG is vast and rapidly changing. As with any new regulation and evolving topic, we can expect to see many practices fall into a “grey” area, requiring additional context and interpretation. It is worth developing at least one ESG champion within your compliance team who will work to broaden the team’s knowledge of climate risk and ESG. Setting up an effective monitoring system to track and communicate the latest developments between teams is another effective preparation step to take.

2. Define the approach

Reviewing your current methodologies will help you assess whether climate and ESG disclosure rules in general will require the introduction of new compliance verification procedures or testing of controls and updating your reporting documents. governance. The processes applied must ensure adequate monitoring of compliance with climate rules and voluntary ESG disclosures.

You may need to develop a new typology to divide a complex world of ESG and climate disclosures into manageable bands. Additional consideration should be given to regulatory disclosures versus voluntary disclosures and how associated risks and gaps will be identified, documented and addressed.

Another central element is to identify the stakeholders involved at the start of the process. ESG and climate disclosures will require a multidisciplinary approach. Chances are the compliance element is part of cross-functional efforts. Aligning your plans with internal and external stakeholders and establishing effective collaboration now will yield better results in the future.

3. Master the technology

Any new activity adds to your compliance team’s already busy schedule. One solution to consider is automation. The starting point is to assess your existing compliance software for adjustments required in anticipation of the workload associated with climate disclosures. Does your current technology require adding new categories and forms to perform risk and gap analysis? Will it require integration with other platforms for data flow and capture?

When answering these questions, it’s also important to have a broader conversation with your governance, risk, and compliance tools provider. Many GRC technology vendors currently offer certain ESG resources and solutions. Depending on the vendor, the solution can vary from a simple out-of-the-box ESG report template or risk inventory to a fairly sophisticated ESG assessment module and advisory application.

Contact your supplier now to understand what products they have in the works to prepare for upcoming climate disclosure rules and how you can incorporate it into your practices going forward.

Time spent on preparation translates into time saved on execution. As we watch ESG standardization and regulation unfold, investing effort in assessing compliance capabilities, approach and technology can pay huge dividends at the implementation stage.

Tahmina Day was Head of Corporate Governance for the ESG Group of the International Finance Corporation. Most recently, she held leadership roles in governance, risk and compliance at CIT Group, Inc. and Fannie Mae. She can be reached on LinkedIn.