Expert insight into the ESG agenda

The Compliance Institute of Ireland recently approached Lysis Group to share their expertise regarding ESG in the operational compliance space with specific reference to the “Implementation of an Effective ESG Agenda”.

Lauren Parmeter, a Senior Consultant at Lysis Group and the group’s ESG Lead, led the presentation by providing an overview of ESG and emphasising that more and more investors are incorporating ESG elements into their investment decision making process

She added that not all sectors of the economy face the same ESG challenges. For example, in the case of banks and Financial Institutions, (“FI”) greenhouse gas emissions are not as important as they are in the energy sector. The differences in what matters to a particular sector from an ESG perspective is material since each firm reports on aspects that are important to them. Typically, the materiality of an is determined based on what ESG issue is considered financially material in the given industry and what ESG components have the most significant impact.

The operational aspects of ESG

The webinar also focused on the considerations of an effective ESG agenda which include the following:

• Firms must monitor internal ESG commitments: Management should appoint an individual or team to monitor the firm’s ESG commitments as well as assess competitors.
• Firms should treat ESG statements as public statements: ESG statements, whether made by a public or private institution should be treated as legal disclosures. ESG statements made publicly should be checked to ensure factual accuracy and ensure that objectives set are realistic in relation to the nature of business and size of the firm.
• It is important to ensure that firms’ workforces are educated and trained: All employees should be aware of the firm’s ESG commitments through regular training. Individuals that are responsible for ESG documentation should also be aware of the risks associated with public documents and understand the importance of ensuring that ESG documents are consistent with the firm’s business.
• Firms must ensure that they can effectively measure ESG performance: Those responsible for ESG within the firm need to establish procedures to help determine whether the ESG commitments and objectives are being met. This can help firms to identify potential vulnerabilities and weaknesses and mitigate any associated risks.

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Managing and embedding ESG risk factors

Lauren continued to outline that firms should manage ESG risk factors by defining what ESG means for them and what specific ESG risks they may be exposed to based on their nature of business.

Categorising ESG risks can be done by asset class, sectors, products or by jurisdictions. It is important to utilise readily available information, which will allow firms to embed ESG into their risk frameworks.

In 2021, the European Banking Authority (“EBA”) published a discussion paper on the management and supervision of ESG risks, specifically in regard to credit institutions and investment firms. The paper highlighted key considerations that firms should be aware of when building ESG frameworks.

?The EBA highlighted the role of strategy to recognise and incorporate ESG factors as key drivers of risk. Integrating ESG risks into the business strategy is integral which in turn, should factored into the wider operating model.

In practical terms, the use of ESG scenarios is also a vital tool to shape long-term strategic planning and essential in driving ESG risk management. The EBA also expects firms to align their strategies to widely recognised ESG objectives and measures through various reference points. These include, (but are not limited to) the Sustainable Development Goals, the Paris Agreement Capital Transition Assessment toolkit, and the UN Principles for Responsible Banking/Investing

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ESG and Client Lifecycle Management (CLM)

The final section of Lauren’s presentation looked at what ESG means for Client Lifecycle Management (”CLM”). She explained that ESG is becoming a crucial element of financial services and becoming increasingly important as an increasing number of jurisdictions adopt regulations and standards. With the implementation of the Sustainable Finance Disclosure Regulation (“SFDR”) and the Corporate Sustainability Reporting Directive (“CSRD”), the EU has led the charge in ensuring ESG considerations as a key element of CLM.?Lysis, as a specialised CLM provider understands the importance of understanding how to embed ESG requirements and obligations in the CLM journey.

How Lysis Group can assist firms

Lauren concluded her presentation by stating that although regulators play an important role in standardising and enforcing the ESG agenda, many firms will not have the in-house resources necessary to action relevant ESG obligations. Lysis Group can therefore help firms in a number of service lines:

• Provide ESG tooling through established partnerships, to equip customers with ESG scorings and realistic objectives;
• Help to align ESG initiatives with internal priorities;
• For those that have public disclosure requirements, aid in the development of ESG reporting;
• Creation of ESG policies and strategies;
• Provision of ESG regulatory horizon scanning, ?to ensure firms are aware of their current and future regulatory obligations;
• ESG training, including the facilitation of successful adoption;
• Support to operationally enforce ESG requirements, such as those that will be required as part of the KYC process; and
• Review of Customer Risk Rating Methodologies to encompass ESG data points.