Strategy, Risk Mitigation and Data Management

As the regulatory landscape for ESG (Environmental, Social, and Governance) intensifies across the financial services industry, organisations can benefit from a strategic approach that moves away from merely matching compliance with emerging regulations. ESG offers a source of new growth if associated challenges and unprecedented risks are managed. Firms need to consider how to create a competitive advantage through adaptive change. Effective risk mitigation targets the necessary but complex uplift of interconnected processes and policies for ESG strategy. Data management governance and tools provide the critical evidential backbone, supporting firms in their meaningful delivery of ESG strategic targets.

With the trend of ESG only accelerating, how might organisations create new strategic growth through effective risk mitigation and data management?

A comprehensive ESG Strategy requires a complex and multi-faceted transition that can seem bewildering for even the most battle-hardened executives. That said, today ESG progress distinguishes industry participants and flying under the radar is not sufficient.

As ESG preferences maintain significant momentum, it’s never been more important to remain relevant to customer preferences and stay ahead of regulatory expectations. The corporate social responsibility standards of financial services are becoming more stringent, and firms are called on to re-evaluate their value. These growing expectations, and the varying responses across the industry, bridge a notable gap. This ESG gap represents a critical differentiation that sees some firms steam ahead and others left behind.

Importance of Governance

To respond to the growing ESG demand, firms need to pragmatically consider strategic integration whilst continuing to mitigate inherent risks. The focus on the ‘E’ (Environmental) and the ‘S’ (Social) in ESG is where we hear businesses, politicians and advocates most banging the drum - they are popular, and people like to talk about the good things they have done. A fully considered ESG strategy however, requires particular attention to the implications of Governance, or the ‘G’.

The financial services industry has firmly embedded strong governance and risk oversight into its culture, meeting higher expectations. The adoption of governance operating models has become standard practice, ensuring consistent board oversight and effective management execution across the sector. For boards and managers, Governance provides the crucial internal structures to manage risks effectively, comply with regulations, and align operations with broader societal expectations. For customers, asset managers and regulators, Governance provides reassurance of proper oversight and operational implementation. Organisations’ strategic objectives should consistently align with frontline operations and business decisions. For ESG strategy, effective governance ensures a compliant and meaningful ESG transformation.

Poor governance structure can be harmful to a company’s reputation and potentially lead to enforcement action. Recent examples of ESG specific governance misconduct include insufficient disclosure of ESG investment methodologies, underlying investments inconsistent with ESG policy and unsubstantiated sustainability claims. In the face of backlash against greenwashing, strong governance is essential for ensuring credible disclosure and stakeholder transparency.

ESG Data Management

Robust ESG data management is fundamental, due to the complexity, subjectivity, and frequent misinterpretation of ESG data. Data learning and approaches can be restrictive, but comparatively, enabling in this space.

On the topic of ESG data management James Dickson, Managing Director of OCG, said;

“Regulators expect firms to understand, validate and manage the quality of ESG data being consumed and reported for portfolio construction or reporting. Firms should not assume that even the most household name data providers meet this standard, particularly across very broad indices or emerging markets, and need to be alive to the reality of this risk.”.

Informed decision making in ESG benefits from the utilisation of AI (Artificial Intelligence) and real-time information to enhance the systematic gathering and evaluation of publicly available information. Data aggregation technology provides financial services companies with the support to reconfigure these potentially ineffective data models. The advantage of these technologies in strategic ESG uplift is that they provide a single-source data record with the extra reinforcement of multi-sourcing and verification. For executives, ESG data management can sharpen market differentiation and benefit financial markets businesses, through mitigating discovery challenges and creating new growth.

The 2017 Hayne Royal Commission left many lasting lessons for the financial services industry, including the critical importance of meticulous documentation. The collection, accuracy and access of historic records and data for financial advice was brought into sharp focus. For licensees, this precedent serves as a warning of the need to take documentation and data management seriously. Proper attention to data management prepares entities for regulator and auditor review, instilling appropriate data controls, lineage and governance for ESG confidence.

Recent ESG Progress in Australia

Recent regulatory updates point to escalating consumer and legislative sentiment towards ESG transformations in financial markets. On the 22nd of August 2024 the Senate passed legislation to enact Australia’s mandatory climate related financial reporting, triggering significant change in ESG reporting processes under Section 4 of the Corporations Act. This recent progress reflects a policy projection in Australia alongside adoption of the first global sustainability reporting standard published by the International Sustainability Standards Board (ISSB) in June 2023. The Australian Securities and Investments Commission (ASIC[2] ) released their report on ‘Interventions on Greenwashing Misconduct: 2023-2024' in August. ASIC’s findings on Greenwashing reflect widespread intervention around the quality of disclosures and importantly – the data underpinning them. In relation to data management, ASIC Commissioner Kate O’Rourke said “Sustainability-related information, like any other, should be accurate, based on reasonable grounds and be easily understood by investors,”. Financial market participants are called to respond to evolving sustainability standards and ESG reporting requirements, an opportunity for decisive action but not without its risks.

By prioritising robust data management and effective risk mitigation, organisations can not only navigate the complexities of ESG compliance but leverage this capability as a driver of competitive advantage. As the regulatory landscape continues to evolve, those who proactively integrate ESG into their strategic objectives will be better positioned to excel in a market increasingly driven by sustainability. The time for action is now; by refining data management frameworks, bolstering governance structures, and addressing inherent risks, financial services firms can unlock new possibilities for growth and ensure a resilient future in an ESG-focused world.

How OCG can help

OCG assists financial services firms in managing ESG complexities through strategic partnerships, advanced technology, and robust data management, ensuring effective risk mitigation whilst creating new growth opportunities.

Source: This article was originally published in the Stockbrokers and Investment Advisors Association Monthly October, published on SIAA Monthly – Stockbrokers and Investment Advisers Association

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