How your compliance team can get ready for ESG developments

Some banks may prefer to have a cross-compliance collaboration approach to ESG.

By Tahmina Day

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

With these developments underway, banks that are already practicing climate and ESG disclosures, and those that are getting started on this path, soon may embark into a new journey—compliance with climate disclosure regulation.

While the execution of any approved disclosure rules will be unique to every bank, and most likely will fall on cross-functional teams, one function in particular is being put in the spotlight—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 can soon expand the scope of this team adding new responsibilities and requiring an effective approach to managing associated compliance risks.

As the SEC climate disclosure proposal is being finalized, now is the right time to evaluate your preparedness. What can compliance leadership do now to set their teams for success? Here are three distinct steps that compliance professionals can take today for better outcomes tomorrow.

1. Building a foundation

If your compliance team has not been monitoring the latest ESG and climate disclosure updates, now is the right time to engage them. Getting up to speed with the proposed rules, and some of the underlying frameworks, such as TCFD and GHG Protocol, is the first step.

Next, it is important to address two fundamental questions:

Who will be involved? Every bank has its unique compliance organizational structure. Revisiting a compliance chart will help to understand what group or team within compliance is best suited to be engaged with climate disclosure rules. While some banks might be well positioned to have a dedicated role or even a team, others may prefer to have a cross-compliance collaboration approach with representation from CRA compliance, regulatory and internal compliance teams.

And do you have enough knowledge and expertise? The world of ESG is broad and changing fast. As with any new regulation and evolving theme, we can anticipate seeing many practices falling within a “gray” area, requiring additional context and interpretation. It is well worth developing at least one ESG champion within your compliance team who will work on expanding the team’s knowledge of climate risk and ESG. Establishing an effective monitoring system to follow and communicate the latest developments across teams is another effective preparation step to take.

2. Defining the approach

Revisiting your current methodologies will help to assess if climate disclosure rules and ESG in general will require introducing any new compliance review or controls testing procedures and updating your governance documents. The applied processes need to provide adequate oversight over compliance with climate rules and voluntary ESG disclosures.

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

Another central component is identifying involved stakeholders early in the process. ESG and climate disclosures will require a multidisciplinary approach. Chances are that the compliance piece will be a part of cross-functional efforts. Aligning your plans with internal and external stakeholders and building effective collaboration now will yield greater results down the road.

3. Getting tech-savvy

Any new activity adds to an already strained schedule of your compliance team. One of the solutions to contemplate is automation. The starting point is to evaluate your existing compliance software for required adjustments 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 input?

As you address these questions, it is also important to have a broader conversation with your governance, risk and compliance tool provider. Many of the GRC technology providers are currently offering certain ESG resources and solutions. Depending on the provider, the solution may vary from a simple out-of-the-box ESG reporting template or risk inventory to a quite sophisticated ESG assessment module and advisory application.

Reach out to your provider now to understand what products they have in the pipeline to prepare for the upcoming climate disclosure rules and how you can incorporate it into your practices moving forward.

Time spent in preparation translates into time saved in execution. As we watch the unfolding of the ESG standardization and regulation, investing efforts to assess compliance capabilities, approach and technology can pay extensive dividends at the implementation stage.

Tahmina Day served as a corporate governance officer of the International Finance Corporation ESG Group. Most recently, she served in governance, risk and compliance leadership roles at CIT Group, Inc. and Fannie Mae. She can be reached at LinkedIn.

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