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Creating An Effective ESG Framework and Managing a Changing Risk Landscape: Boldly Go Where the World Is Going!

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By Fraser Hall, Global Product Manager – FinReg, AxiomSL.

European regulators are leading with environmental, social, and governance (ESG) disclosure requirements, although given the direction the world is going – in terms of ESG framework development – other regulators will not be far behind. The European Banking Authority (EBA), European Securities and Market Authority (ESMA) and European Insurance and Occupational Pensions Authority (EIOPA) have coordinated their requirements to enable organizations to meet standardized ESG disclosure mandates. Those ESG disclosure requirements are coming into force in January 2022, with a two-year transition period concluding in 2024.

At present, ESG disclosures in many jurisdictions involve a patchwork of mandates – including for example voluntary disclosure in Australia and Japan, mandatory disclosure often via a scoring system in Singapore, and a new January 2021 requirement in the United Arab Emirates for public joint stock companies to publish a sustainability report. Given the impact of ESG on the global financial system, organizations are awaiting formal guidance in many parts of the world. In the US, the Financial Stability Oversight Council (FSOC) is currently undertaking an assessment of climate risk on the financial system, and New Zealand recently introduced a bill that, if passed, will make climate-related disclosures mandatory for approximately 200 organizations in the country.

Clearly, institutions must prepare their ESG frameworks right now. But when taking into consideration factors like the United Nations’ development goals, other global frameworks and associated risks, it is important to look further than 2022, at both the five-year horizon and well beyond. As the world transitions to increasingly green priorities, no organization will be insulated from having to confront issues that are shaping the present and whose consequences will affect future generations.

Like the characters in Star Trek, who went boldly into space where no-one had gone before, organizations will need to respond just as boldly to this global mission and traverse the world of ESG rather than the outer galaxies. There will be a cost and capital impact for incorporating emerging risks and accommodating ESG mandates. Organizations need an effective, technology-driven approach – an ESG framework – for managing foreseen and unforeseen risks.

Beam Me Up, Mr. Scott!

Important questions organizations may be asking as they create ESG frameworks that can handle diverse challenges include:

  1. Are ESG risks a separate risk category?
  2. Are we able to capture ESG risk data alongside existing exposure information to satisfy disclosure data points?
  3. Are our models adaptable – including accommodating natural disasters, retirement liabilities, population demographics, environmental weaknesses, and black- swan events in various stress testing scenarios?

As firms assess their capabilities and answer these questions accordingly, they will be looking to create an ESG framework and risk management ecosystem that supports actionable business decisions associated with the aim of growing the green economy. When Captain Kirk asked Mr. Scott to ‘beam him up’ to the Starship Enterprise spaceship, the process was instant. While creating an ESG framework may not be so instantaneous, a technology-driven approach will lay the foundation for seamless processes. Digitalization technologies will enable increased functionality while decreasing the resources required to effectively manage diverse risks and grow businesses that will have positive global impacts, including promoting sustainability and driving economic and social progress.

Mr. Spock, What Do We Know?

As the trusted science officer of the Starship Enterprise, Mr. Spock was often called upon to provide facts about the galaxy and how to navigate it. He once postulated that there is no reason for function not to be beautiful.

A Futureproofed Tomorrow With A Comprehensive Risk Ecosystem

Amid evolving global circumstances and an ever-changing risk landscape institutions must position themselves to respond nimbly to change with functional capabilities that are indeed beautiful. A comprehensive ESG framework and risk ecosystem will pave the way for them to futureproof their risk management and capabilities for ESG mandates and other capital/credit/liquidity reporting requirements. Risk management teams and senior stakeholders will thus gain both high-level and granular views of their organizations’ capital/credit/liquidity risk positions and their ESG framework.

If they leverage technology-driven solutions, organizations are enabled to create an effective and future-proofed ESG framework to meet the demands of a changing world that seems to be moving at warp speed – which as we know is faster than the impenetrable speed of light.

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