Rohini Gupta, the Director and Lead Regulatory Advisor at FinregE.
Sustainability has become an increasingly important point of focus for businesses throughout the last decade. Recently, it has transitioned from a strong brand moral differentiator and value into a point of compliance by which companies have to abide by.
The UK Environmental Act means that businesses are now facing real scrutiny over air and water quality, and resource and waste management. With the UK’s plan for decarbonising all sectors of the UK economy by 2050, there’s a strong likelihood that further legislation will soon come into play.
So, how can businesses best manage these complex new regulatory compliance matters in line with their own sustainability goals?
How to implement and manage the new sustainability regulations
Compliance in any area is always a difficult balancing act and regulations change on a regular basis. When implementing new requirements, you can find yourself facing resistance from employees or even the leadership team and new systems and new processes can seem to hamper productivity. And even where compliance is accepted and adhered to, it can be difficult to demonstrate, lacking an accessible audit trail.
The problem is, where compliance is not observed – and demonstrated – there is the potential for enormous penalties to be levied. But while there are no shortcuts to compliance, there are steps that businesses can take to ease the implementation and management of new compliance protocols.
The key to implementing and managing new sustainability regulations is staying up to date with compliance issues and maximising the power of technology.
The importance of staying up to date with compliance issues
Lack of awareness is one of the most common reasons for compliance failings. However, ignorance will never be an acceptable excuse by regulators.
Staying up to date with the compliance expectations of your industry is integral if you wish to avoid unknowingly breaching regulations. But with current rules changing on a regular basis, it can be hard to keep track. That’s why some compliance platforms provide tools designed to enable the easy tracking of regulatory changes. This is to be certain that the platform you work with takes into account the emerging rules and regulations related to climate and environmental risks, rather than simply focusing on financial regulation.
Maximise the power of technology
Regulatory technology (RegTech) has evolved alongside FinTech and InsurTech and provides organisations with an easy solution for the optimisation of regulatory compliance. But it can also be used to help innovate company processes, facilitate growth, and enhance sustainability goals.
With the application of machine learning (ML), natural language processing (NLP), and a deep learning structure, it is possible for businesses to automate many compliance issues. Using tech to structure, label and summarise the data they need to assess their sustainability risk exposures. Gathering data from global resources – publications, research, governmental guidelines – and using it to engage in sound climate-related risk management, scale up their investment in sustainability, and enhance their financial resilience.
To do all of this manually would be an almost impossible task. Taking hundreds of hours of resources on a weekly basis. At present, climate and environmental risks-related information is typically in an unstructured format across multiple global websites. No single provider platform brings all this information together. Through the use of ML, this work can be managed behind the scenes, with relevant action points being flagged only when required. Removing a significant burden of time and money from individual businesses, while providing additional scope for the implementation and management of new sustainability goals that will take a business beyond the bare minimum required.
Using AI to monitor compliance in real-time
For financial institutions (FIs), compliance is nothing new. This is the field where RegTech cut its teeth, using artificial intelligence (AI), ML, and NLP to monitor customer interactions to detect compliance issues. Whether miss-selling or breaches of the Anti-Money Laundering Act. Throughout the last five years, more and more financial compliance products have come onto the market. And sustainability compliance can be handled in much the same way. With emissions and other linked data being tracked by AI, building that audit trail into every process. And for FIs, this is important.
FIs make contributions to environmental change through financing activities. Global FIs greenhouse gas (GHG) emissions through financing are reported <700 times higher than their direct emissions (CPD, 2020). Identifying climate and environmental-related risks in their asset financing decisions and exposures help support the financing of a green agenda which will help tackle climate change.
But the materialisation of physical/transition risks makes FIs vulnerable to value erosion in their corporate/financial commercial status. FIs need to understand their exposures to these risks to act to reduce their vulnerability.
Commercially, FIs are being judged on their green credentials, with pressures mounting to incorporate climate factors into FIs’ capital allocations and loan/asset portfolios.
What’s in the future of sustainability compliance?
Sustainability compliance is still in its infancy. But with the global emphasis on emission reduction and environmental protection, we’re unlikely to see any withdrawal from the sphere. Governments are still learning and developing regulations that can help manage and control businesses’ environmental impacts. Given the complexity and importance of the issue, there is every expectation that regulations will become stricter and heavier repercussions will be implemented. So that businesses that fail to act now, in the early stages of legislation, may well feel the effects of being unable to meet requirements under the changing regulatory expectations.
With sustainability now at the forefront of the world’s minds, it is important for businesses to be setting sustainability goals for their customers. However now with global institutions requiring companies to reach certain green milestones and meet certain sustainable standards, compliance is now necessary so businesses aren’t penalised.
Rohini Gupta, the Director and Lead Regulatory Advisor at FinregE. Rohini has over 15 years of experience in a wealth of areas including asset and wealth management, investment banking and retail banking, capital markets and financial services. Rohini started FinregE in 2018 and is the brains behind FinregE’s regulatory interpretation and compliance workflow solutions, which are designed based on her extensive hands-on experience and domain knowledge in regulation and compliance.