What to Know about ESG and GRC: Part 2


This article is the second in a 3-part series focused on guidelines around regulations, reporting and related initiatives faced by marketing operations teams, compliance managers and legal and risk directors. The first article focused on regulations put in place by the United States government, its enforcement entities and other ratings agencies and industry influences impacting corporate governance. Here, a deep dive into Environmental, Social and Governance (ESG), followed by valuable insight from industry experts on the importance of preparing for and improving an institution’s disclosure management process.

Driving Revenue and Regulations

While driving relationships and revenues are critical to finserv success, the complexities of compliance – in highly-regulated industries like banking and wealth management – make it vital for marketing teams to simultaneously stay laser-focused on doing disclosures properly, with accuracy, traceability and auditability top of mind.

Getting and staying competitive requires martech leaders to be perpetual multitaskers. Collaborating with various divisions across the enterprise to manage offers and disclosures creates challenges that legacy systems and outdated processes can no longer handle. Cycle times, speed to market, personalization, landing and expanding relationships, all while generating revenue and reporting for compliance make for marketing mayhem.

esg2 1These realities reinforce the role of technology innovations to answer the compliance call. Regulatory readiness and operational efficiencies are critical components providing a competitive edge to leading finserv institutions. Those who embrace best practices, leverage innovation and automation on the regulatory front will be best poised to get and stay atop their competitive and complex markets.

As we see an increase in the number of offers and marketing initiatives being deployed, there is also an increase in regulatory guidelines experts are predicting will impact U.S. financial services companies. A review of primary components of corporate governance is useful in helping marketing and disclosure management teams determine best pathways forward.

Spotlight on Environmental, Social, and Governance (ESG)

Investors are increasingly applying these non-financial factors, such as Environmental, Social and Governance (ESG) as part of their analysis process. This helps to identify both risks and opportunities. ESG metrics are not commonly part of mandatory financial reporting, though companies are increasingly making disclosures in their annual report or in a standalone sustainability report. As noted by the CFA Institute, which monitors key debates and evolving issues in the investment industry, and sets professional standards for investment management practitioners: ESG investing and analysis has become of increasing interest to investment professionals globally as governments, asset owners, and high-net worth investors consider the impact of ESG factors on their investments and local markets.

Why and Where Regulatory Reporting Matters

esg2 2Governance, risk and compliance (GRC) issues, and the growing emphasis on environmental, social and governance (ESG) criteria are lighting a fire under those charged with compliance reporting to find better ways to manage their compliance systems.

A summary from the Alva Group highlighted the current regulatory landscape. They define Environmental, Social and Governance (ESG) criteria as a group of standards used by socially conscious investors to screen investments. They note that ESG growth is rooted in Corporate Social Responsibility (CSR), which marked the starting point of these corporate initiatives. CSR is a self-regulatory model practiced by businesses. As such, ESG is replacing CSR as it, ultimately, has tangible, meaningful impact. Shareholders are increasingly focused on ESG issues as a way of ensuring long-term financial performance. Both investors and consumers want to know that the business they buy from has positive ESG values. So it behooves companies to have sustainable, socially responsible and environmentally aware business practices to win and retain customers. The increased emphasis on these initiatives in quarterly and annual reports from financial services companies is proof positive that the spotlight on ESG will only get brighter.

Global Guidelines Inform Finserv Compliance Goals

Addressing the global landscape, and how it is likely to impact U.S. finserv, we conducted a listen and learn session with members of a team with whom we regularly partner for clients. To gain perspective, we facilitated a discussion with top digital transformation and customer experience consultants from Capgemini. Our teams work regularly and closely with these DX and UX experts to solve financial services clients’ most pressing problems. Together, the trusted collaboration has delivered unprecedented results for some of the country’s leading financial service organizations.

For their part, the Capgemini consultants help finserv institutions to develop strategic vision and identify innovative solutions to enhance revenue and improve operations in the fast-paced industry. First-hand knowledge of financial standards and market trends allow them to help financial firms leverage capabilities to enhance productivity and financial performance.

These experts specialize in strategy and risk management, focusing on emerging technologies. They apply valuable experience in leading large transformations, implementing large risk management programs for major banks. As with any major initiative in these complex industries, the collaborations and trusted partnerships we forge combine to serve as a marketing force multiplier from which banks, wealth management clients benefit.

What we learned reinforced our message to clients to put compliance efficiencies in place sooner than later.

There are a number of entities which contribute to the guidelines and standards finserv institutions and insurance industry businesses follow, according to Capgemini’s Global Capital Markets Practice team leaders. Predominantly, those directives emerge from: International organizations; Market Standards/Industry Framework; and Rating Agencies, which provide indexes and best practices, as well as some form of methodologies for disclosures from which ratings emerge.

Global Guidelines Impacting US Finserv Regulatory Compliance

The European Union (EU) established the Sustainable Finance Disclosure Regulation (SFDR), which operates as a disclosure act for asset managers. If they are selling a product they have to follow the SFDR disclosure guidelines. This is comparable to the Department of Justice (DOJ) and its Best Interest Disclosure Act.

Asset managers are still trying to get a handle on the multitude of ESG-based regulations coming out of Europe, according to a February 2021 report by Bloomberg Professional Services. The European Supervisory Authorities (ESAs) have proposed technical standards on what will need to be disclosed under the (SFDR). In identifying what SFDR can achieve, the Bloomberg Professional Services article offered valuable perspective:

esg2 3SFDR is part of a broader package of legislative tools designed to reorient capital towards more sustainable businesses. The main objective is to ensure that financial market participants are able to finance growth in a sustainable manner over the long term. Financial market participants (FMP) are defined as investment firms, such as asset managers who offer portfolio management services, pension providers, and insurance-based investors, qualifying venture capital and social entrepreneurship activities. In-scope financial products will include investment and mutual funds, insurance-based investment products, private and occupational pensions, and both insurance and investment advice. If any of these products make sustainable investments, the manager should disclose how those investments are compliant with the ‘do no significant harm’ principle laid out in the regulation.

In the Naehas team discussion with Capgemini consultants, the likelihood of variations of SFDR coming to the United States soon was highlighted. Using the GDPR analogy, one panelist said he foresees that states like California, as they did with CCPA, will be first to implement similar guidelines, and other states will follow. Important, also, is understanding the United Nations work in defining 17 Sustainable Development Goals (SDGs). These serve as a basis from which sovereigns and corporations govern themselves. Understanding those factors helps inform those who manage compliance, and seek solutions to automate for operational improvements.

Capgemini’s team also reinforced the importance of market standards and industry framework which have been established. Multiple institutions, including the highly-regarded Task Force on Climate-related Financial Disclosures (TCFD), as well as the Sustainability Accounting Standards Board (SASB), and the Global Reporting Initiative (GRI), are working to form standards, direct the disclosure efforts and reporting requirements. Add to this the for-profit, third-party rating agencies noted earlier which support disclosure management.

The totality of these regulatory realities creates a clarion call to do compliance better.

Efficient, accurate, transparent, auditable regulatory compliance must be a top priority for teams managing offers, disclosures, risk and revenue.

Stay tuned for the next article in the regulatory compliance readiness series. We’ll next address the specific ways to optimize disclosure management to achieve accuracy and reduce risk.