The Role of Regtech in the ESG Revolution
Hayden Boilini is the UK Department for International Trade’s Vice-Consul for Financial Services, based out of the British Consulate in New York.
Anastasia Dokuchaeva is Head of Product at Clausematch, a global regulatory technology company automating policy management and compliance at financial institutions and other regulated industries.
Over the last few years, the global financial services industry has witnessed nothing shy of a revolution in ESG and Sustainable Investing; what was once a novel concept now tops the agenda for senior managers, from Tier 1 institutions like BlackRock and Goldman Sachs to family offices and boutiques of all sizes. In the US alone, one in 3 dollars invested, or $17 trillion AUM, now falls under some sort of ESG or sustainability mandate. According to Bloomberg, by 2025 ESG assets may reach as high as $53 trillion, representing a third of global AUM.
As Banks, Insurers, and Asset Managers look to upgrade their capabilities, tools, and products, so too will regulators seek to codify frameworks and disclosure methods, and take steps to encourage companies to become more environmentally and socially conscious. This is an area where regulatory technology firms, whose solutions are specifically designed to help companies meet their compliance needs, will play a crucial role.
How far off are regulators in making these changes?
In the United Kingdom, this process has already begun. In 2019 the UK rolled out new ESG pension rules as a first step in codifying disclosure methods, and in the same year, the government announced an ambitious green finance strategy, with the goal of achieving net-zero by 2050. Most recently, as part of this strategy, Rishi Sunak, Chancellor of the Exchequer, announced in November 2020 that the UK will issue its first-ever Sovereign Green Bond (commencing in summer 2021), and become the first country in the world to make TCFD-aligned disclosures mandatory.
In the United States, within weeks of President Biden taking office, US regulators issued numerous public statements outlining their response to climate change and social responsibility. In her January confirmation hearing, Treasury Secretary Yellen stated her intention to create a new climate change hub at UST to examine financial system risks arising from climate change. In the same month, the Federal Reserve announced that it would form a new Supervisory Climate Committee to study the implications of climate change for financial institutions.
In February, the Securities and Exchange Commission (SEC) followed up with its own review of how companies are disclosing the risks they face from climate change, and in March, announced that it would create a dedicated Climate and ESG Task Force with the aim of proactively identifying ESG-related misconduct.
All of these announcements are a clear indication that changes to ESG-related regulation in both the UK and US are not just on the horizon but already here. Regulatory Technology companies will play a critical role in helping firms monitor and implement these changes as they develop.
How will RegTechs help companies meet these new obligations?
Regulatory technology is one of the fastest growing subsectors within FinTech as both businesses and the regulatory regimes governing their activity becomes more complex and internationally connected. RegTechs carry out a variety of critical functions including banking supervision, policy management, fraud prevention, and a host of AI and ML driven monitoring, reporting and compliance needs that benefit the financial industry and better protect both businesses and consumers.
The overall objective of RegTech is to improve transparency as well as consistency of regulatory processes. It is precisely this need for transparency and consistency that is driving both regulators and industry to adopt more comprehensive policies around ESG and climate related risk, not just to protect investors or the financial system, but also to encourage companies to consider how they can better serve environmental and social well-being.
Financial companies can do much to support these initiatives. The industry has an important contribution to make in achieving net-zero, enabling climate action, and ensuring universal access to services. Effective regulation and governance are essential to driving these changes; however, it can be quite challenging for the firms themselves to implement them given the lack of consistency across jurisdictions and current gaps in data for assessment, monitoring, and rating of ESG and climate risk.
Whatever obligations do result from these changes, firms will need to weave them into their existing practice on a group policy level and down the line. They will need to constantly monitor their practice and put all of their products in different categories weaving in the obligations for each type of product based on jurisdiction. This process does not affect only policies but also brings changes to the control level.
For most firms, rolling out new policies and updating old ones so they are in step with fast-changing regulatory requirements often feels like trying to hit a moving target. This is where RegTech can really help companies stay agile and meet new climate and ESG related obligations.
One solution that could help firms meet these new obligations is the Clausematch policy portal. Head of Product at Clausematch Anastasia Dokuchaeva said:
“Due to the pandemic, we have seen firms change and implement new regulatory and government guidance into their business continuity plans, their policies and procedures, and processes on an almost daily basis. With the distributed workforce, it became near impossible to manage these using old methods and the challenges don’t stop once new rules are in place. Policies also have to be routinely monitored for compliance across the whole organization. Thus, we developed a single centralized policy portal for whole organizations to utilize.”
This is just one example of a RegTech solution that could be a solid first step in helping companies streamline their ESG compliance practices.
Over the last several years, RegTech has matured greatly as a sector and there now exists a plethora of highly advanced tools which can be repurposed to help companies and organizations monitor their own climate risk, develop and track new internal and external policies, and meet the oncoming wave of climate and ESG related discourse requirements. It is safe to say that RegTech will play a critical role in ushering in the ESG revolution.