Speakers:
Kayvan Alikhani, James Phillips and Christine Reddy

Webinar Details:

• ESG: Impact on compliance
• What’s happening in the EU/UK?
• The US perspective on emerging risks
• Horizon Risk: ESG related Regulatory activity on the horizon
• Operational Resilience: Building a compliance practice that is not ‘shocked’ with the next ‘ESG’
• Best Practices: What you need to develop and or apply to avoid ESG-related regulatory change risks.
  

Moderator

Hello, everybody, we’re just going to wait a couple of minutes while everybody files into the room here and we will get started in a few minutes.

Kayvan Alikhani (Kayvan)

Ronjini, Do you still see anything wrong with the presentation or is it corrected?

Moderator

I see the slides on the side if you could stick it in presenter mode that’d be great.

Kayvan

Is it okay? if we see, it’s easier to navigate.

Moderator

Yeah, we could do it this way too.

Kayvan

Okay, you’re right, this looks cleaner.

Moderator

Holding Out for that 50 Mark on that.

Moderator

Alright, let’s get started. Hello and welcome to Compliance AI’s webinar, “Emerging risks ESG and compliance” – a global perspective on emerging risk. This is a follow-up webinar to a previous one we had in November. So hopefully, you’ll be able to access that as well. We’ll send you guys some information. In the meantime, during this webinar, if you have any questions, or comments, please drop them into the comment section (specifically the q&a box below). After the discussion, our panelists will answer them if we have some time. Otherwise, we’re more than happy to send over the answers after the webinar as well. And with that, I will hand this over to our CEO & co founder, Kayvan Alikhani, to get started.

Kayvan

Thank you Ronjini. I really appreciate everybody participating, specifically esteemed individuals with compliance, expertise and background here helping us. James Phillips joining us and of course, Christine Reddy, both of whom are advisors. I really appreciate you joining us in this session as we focus on environmental social governance related activities. I would call it from one side, regulatory. From the other side, organizational. Our company is looking at ESG initiatives within the organization. Is it more of a characteristic or is it one of becoming better corporate citizens? What is the lay of the land? The impact that environmental social governance related matters has specifically in compliance and compliance individuals, team members within compliance departments. What frameworks? In November, we talked about an acronym, a “bingo number” of frameworks that organizations can select. From where are we now, where do companies start? Then also, establishing operational result resilience (as it relates to environmental social governance initiatives) and the next ESG type-set of regulations. What rules do companies need to adhere to (from an operational perspective?) Are we looking at not so much of a change, but at more of the same? (In terms of a large number of regulatory changes?) The conversations I’ve had with our advisors, including the two team members who have joined today, have been ones of confusion around the regulations. Where am I looking and what am I adhering to? It also looks like a sharp contrast between North America and what we’re seeing within the United Kingdom.

<To Moderator>

Thank you, Ronjini for posting the link to the prior webinar.

You can see where we came from: the differences, the contrast across the globe, (specifically United States compared to UK and EU at large.) And what kind of adoption or traction? Have we been in compliance with ESG related initiatives or are companies just taking proactive measures to get there? With that, I wanted to start with a poll: asking the question, “Where are you as an organization in terms of ESG related initiatives?” You want to be good corporate citizens. Great stewards of business and planet Earth. Therefore, are you implementing the “E” part? The “S” part? (meaning diversity throughout the organization?) Obviously, governance as well. Is it more of a company driven set of initiatives or is it investor driven? Boardroom driven or is it one that’s driven by regulatory costs and fines? You don’t want to see your name in the news. We’d love to hear back on this. So, I think Ronjini, you’ve opened the poll already.

Moderator

Yes. We’ll leave it up for a few seconds here. Looks like “all of the above” is winning.

Kayvan

Yeah. Which kind of goes back to that confusion comment we made a little bit earlier. Yeah.

Moderator

Yep, we have a winner: “all of the above.”

Kayvan

All right. Okay. Well, all of the above sounds like what’s going on?

Yeah, all of the above by 54%, followed by” we fear compliance constitutes compliance driven” and followed by “we’re just really good corporate citizens and stewards of business.” So very interesting. And coming at it from the perspective of ESG. ESG is being pushed and suggested, ultimately leading to some form of backlash. Christine, tell us a little bit about what you’re seeing in terms of companies’ postures towards yesterday.

Christine Reddy (Christine)

Absolutely. So just a little bit about my background, and why I’m sitting at this table. Also, I’m so thankful to have been included in this conversation. It’s such an important conversation. I was at Fannie Mae, in financial services for 15 years. At Fannie Mae, they have a public/private kind of mission and they set up (pretty early) a board oversight committee that I was very involved with, to try to drive ESG activities. Now I’m at a publicly traded company, as the General Counsel and we to have set up board oversight and employee engagement around ESG. And I would say, for the early adopters of ESG, it was really thinking about being good corporate citizens and being responsible stewards of the trust that all of the many stakeholders have in corporations, and I’m staying true at the current company I’m at. But we are publicly traded and of course, we’re mindful of the interests that investors have in seeing an ESG agenda. So, if you take those two things, and then you start to think about the pronouncements from the SEC, (which those of us in the US who are publicly traded care a lot about). The SEC released a rule, and I think we’ll talk about that a little bit later, you guys talked about it in November. That was very controversial. And the final rule still has not come out. It was very controversial. This goes to the heart of why I think that there’s caution to be had and thinking about all of the laudable goals that ESG promotes, and the necessity of compliance professionals being in the mix. You know, when you get to that intersection of what the SEC is telling you to do and then the proposal there, they are actually asking that public filers report on admissions by third parties that they might use. You have no control over that. So that’s like “literally” impossible to do at the standard that the SEC expects, but what that should tell every compliance professional (and person who’s interested in ESG): if you’re working for a company, who’s going to put forward goals related to the environment or social or governance? You need to have that framework, those anchors that make it supportable, auditable. Treat it like financial reporting, if you’re a public company, you treat it like you treat any other compliance challenge and problem. I don’t know if there’s a magical framework. Maybe that’s why there’s a little garden gnome here? There’s probably not a magical framework to pick.

Kayvan

So, it seems like it didn’t come from you and me. Okay, good.

Christine

No, It’s a teaser. But with these allegations of greenwashing, (I’ll just go a little bit to the slide) that really is about the people and it wasn’t about the compliance professionals in the mix. It was the marketers or the investor relations: folks who wanted to drive a particular agenda, started saying things that sounded so wonderful about how green they’re going to be and how much they were going to reduce emissions. Unfortunately, without the underpinning, and the data driven proof of how they were doing that, the allegation is that they are greenwashing things, or they are purchasing carbon credits. So, they were doing things that weren’t really making the environment better, just to be able to promote themselves. And I think, partly as a backlash to that greenwashing, you see this new set of concepts that has just been emerging as a new trend, frankly, (even since practically the November session). You’re seeing this backlash, where people think of ESG as being “woke”, and now there’s an anti-woke campaign that is against ESG. And you see states like Florida actually prohibiting public pension funds from investing in Blackrock, because Blackrock has been the primary promoter of ESG. So, there have been challenges. There’s an investment group that’s challenging the legality of investment advisors, investing without informed client consent in ESG funds. And now folks are even challenging ISS and Glass Lewis, about some of the board diversity policies that they’ve put into place and whether those are valid. It looks like you have a question, James.

James Phillips (James)

Hi, Christine. Sorry, it wasn’t trying to interrupt you. Hello, everybody. On the webinar, I noticed your slide and we’re going to chat a little bit about UK and US differences. I just think it’s worth noting that. I’ll let you take back to your slide in a moment.  We are not seeing (for what it’s worth) this “anti-woke- ism” around ESG in the UK. (Or maybe I’m looking in the wrong place.) It seems to me that everybody is still quite strongly toeing the line over here. Okay. So, back to what you just mentioned. I think I might also say that the gnome I think, is probably trying to greenwash something, but I’m not sure. I like that. Back to you.

Christine

It’s a nefarious gnome. I would say, Is it surprising that in the US it’s really a state by state matter? It’s going to depend on who our president is, at the federal level, affecting how we think about this and also a caution about getting too invested in a particular framework. And I don’t know, we might be ready to go to the next slide here. Oh, this is going to be the impact on compliance. But we’ll talk a little bit later about frameworks again, and how to think about that.

Kayvan

Yeah, lots of frameworks. And you’re suggesting something quite controversial. We saw that backdrop: confusion and adoption at different levels. James, what do you see in terms of compliance? That one side of it is companies posture investment funds attitude towards environmental, social governance related investments, but the other side is companies adoption of compliance practices. Can you give us a sense of what you’re seeing in that regard?

James

Yeah, sure. So, I guess I’m seeing is (and I’ll come to this again in a moment, on a timeline slide that we have) but the principal message I have, what I’m seeing is an acceleration, a real flurry and a pace of output around this. You know, I try and summarize this around the move towards the standardization of interpretation and the standardization of the data taxonomies involved and move towards facts and not claims. If we try and paraphrase (to some extent) what’s been said in the last six months or so, it’s a real acceleration there. Not to say that there hadn’t been a lot of noise before that. We’re also seeing things coming out now around the essence of G rather than also the just the E emphasis on that, quite a lot of conduct-related consultation and indeed legislation in the UK/EU environment, specifically UK, but also around how you finance positive sustainable change: with a driver on governance incentives and competencies within regulated firms, so that it’s suitably oriented from management thinking and lead an executive incentivization perspective. This all speaks to getting the cultural embedding done. A lot of noise awhile back about” let’s get this embedded process”, but now it’s getting to the enforcement of that embedding. So that’s the gist of the change. It’s gone from talk, talk, talk to actually, “let’s get on with walking, said talk.” And in 2023, I think we’re going to start to see some enforcement activity, there hasn’t been much in terms of actual actions around that, if anything, mostly because a lot of the corporate reporting requirements are 2023, in terms of their time to market rather earlier than that. So good governance, healthy culture is critical to firms being able to deliver value. The regulators are saying these noises in many different ways across many different consultations. And I’m not gonna try and quote numbers, and I guess, the majority of your audience, perhaps if they’re stateside, may not be too concerned about the detail. But I think it’s important to see that. One example I will give those, there’s recent legislation come through called “consumer duty” over here, which you think “What’s that got to do with ESG?” Right. But consumer duty is a big thing. Getting it right for the customer, is, of course, a crucial part of governance, right? It’s the G, so you’re going to get a G score out of that. So you start working towards what the metrics are going to say, as you begin to look at what you could be scoring as an organization, both against your own dashboard or against your ability to achieve a good audit outcome. In due course, when there’s a regulated regulatory visit, how to do it. I think that is where the emphasis is now in terms of how you get onto all the talk route to that and then you how to do it. I’ll get to that later on in the discussion, so I won’t go into it now. We’re going to touch on the “how” around the tools that are required for that, data quality. How might you achieve some form of dashboard or score internally. Yeah, so there you go. That’s the thrust of what I’m seeing is a move from SSA talk, a much raw, faster flurry of change about put for both the PRA and the FCA to pra is the supervisory supervisory authority here, the FCA is the Conduct Authority, and from the EBA and equivalent organizations in Europe. And then what they’re outputting is standard data interpretation and facts, not claims,

Kayvan

Moving more towards grading, quantifying, as opposed to things with “moving arms in hand.” Yeah.

James

There’s difficulty around that. Because, of course, the data quality questioning what exactly you’re measuring is, of course, getting caught and called into the frame. And you find, to the point of fact that Christina is making it, how do you measure things like your third parties’ emissions?

Kayvan

You know, how do you do more than that. If I’m a company, trying to set my direction, I have a goal. I have a set of mission objectives, quantifiably? So Christine, what is your advice?  How do I find the right direction?

Christine

Yeah, so having lived through this now twice, (with very different companies), it’s really no different than any other type of strategic endeavor you’re really thinking about. I think that the best goals a company can have are those that serve the the stakeholders of the company, as well as deliver long-term value. And that’s also going to be the safest place. If you think about the US, where we are fractured. And there’s lots of challenges. Anything new is subject to lots of challenges. The way to really be anchored is to set your compasses on your corporate values and what you know.  I know that as organizations, we start by thinking about “what do we already do that fits into these categories?” And what would we like to see ourselves do more of? Because we think it will be beneficial to the company and beneficial to our communities. It was just a great way and you have to actually start by understanding what you are already doing. Inventory that. That’s why I think that clients and professionals are going to be so important because the data is so important. And in some of those areas, I can give an example from my current company: we deliver buildings, products using trucks, we weren’t tracking the emissions of each of those trucks or the year of the truck for for environmental purposes. We had some of this data, but we weren’t using it to understand the environmental footprint. Now we are, but to go from migrating from, “this is what we’re doing and this is what we know, but we need different information. Different data, and we need to track it so that you know the standard . Make sure that what we have here is any data that we’re capturing and anything we’re talking about. If we treat it like it’s financial reporting data that can be audited. And so, I think you’re really only going to be able to start in with things that are already goals that you have or areas where you have some data. You may have to build out that data set and you’re going to have to test it. I would in both organizations. We’ve had cross-functional teams with all disciplines represented, because it is really setting up a whole new mean. There are regulatory frameworks, which in the US, have not been really settled yet. So, you can’t find a place to anchor to tell you what to do. And then there’s just the internal. If you just treat it like something that you’ve got to report to the public or something you’re going to get sued over,  you want to make sure your data is valid. Then everybody knows “how to” set up those kinds of compliance frameworks. Well, you’re responsible for it.

Kayvan

Okay, speaking of frameworks, and the session we had in November> the GDP GRI IRI FRS ESG’S etc (I’m not making this up.) It’s a collection of others, we didn’t even have time to go through all of them. What do you recommend in terms of that type of framework?

Christine

And by the way, all of the investors and the advisory firms have their own proprietary analytical tools that they use to rate and evaluate companies, it is not a settled area yet. It’s sort of like, what cybersecurity once was, it’s not settled. Which is why I say, go to core principles and think about what you can test and know and prove and track and monitor, and will yield benefits and values. And one thing that we ought to talk about a little bit: typically, the ESG-type goals are more audacious and longer term, which we talked about. But as we were getting ready for this, I think that means that it is even more important that they be built on a foundation that has strong data. Because somebody different than you is probably going to have to prove out the compliance and the truth of it in seven years or so. Building that right framework, which is why I guess I would say, build it kind of small and tight to that which you know. Then you can expand that because proving these things, we don’t really know what is going to be the regulatory framework we have to comply with. We just know that it should be true, whatever we say.

Kayvan

So, “presentation reporting”

Christine

That’s how I think about it for now, because there’s not a settled answer. And I think it would be very resource intensive to try to learn all these different frameworks and comply with them when it’s, at least currently, it’s not really settled.

Kayvan

You’ve got something James?

James

Yes, just to say absolutely, there’s so many dynamics, so many things changing so many converging, diverging, probably overlapping, probably super setting issues and data issues. Challenges and compliance obligations. It’s very hard to know quite what to focus down on. And I’m almost tempted to look, I’m looking at one of the questions that’s been posed. I wonder if now is an interesting time to make a point I wanted to make, if I may, in respect to the question that’s been posed. If people haven’t read it. Compliance and risk people are overwhelmed and uncertain for support.

Kayvan

We only have seven minutes left, if you don’t mind. We’ll keep going and get to the q&a session.

James

There’s a lot there, remind me later.

Kayvan

Yeah, thanks. Absolutely. Yeah, we’ll have that. And it’s a controversial question. It’s a pretty juicy one. I thought maybe I would go into it. So sorry, let me go back to where we were a little bit earlier. So talk about “no one framework” is the framework. And so Christine’s main point being “come up with your own” not in terms of the regulation, but having information to share is really the bottom line.

Christine

Yeah, and these are just core principles. Your board and your management team are responsible for putting in systems that monitor risk. You have to do that. You need to think about long term value creation for the different stakeholders that are your constituents. And building that will allow you to pivot and add on additional bits and pieces from whichever ends up being the prevailing, preferred best practice or in fact, regulatory framework.

Kayvan

Very good. Very good. I got the timing wrong, James, we have much more time. That was my mistake. I apologize because that’s what I kept doing and Ronjini corrected me, thank you Ronjini for that. I’m really looking at this from the perspective of what we discussed in the November session, bringing us all the way to the present. We’re rewinding the clock a little bit, from a European EU kind of perspective. Tell us where we have been both in terms of initiatives in terms of regulations change and we’ll get back to that question very quickly as well.

James

Yeah. Oh, we can still discuss the question, it’ll come out naturally, in one of the bullets I have later. If somebody could remind me to answer the question on the UK EU perspective. I think, again, some of these timelines and concepts are global in nature. Just because the whole thing starts off with an international agreement. It doesn’t start off with Paris in 2016. But that’s a good focus point to draw attention, over many years. So, there’s no specific timeline against this. All I’m really trying to say is that there’s been a lot of red and orange, a lot of fuss for quite a lot of time, quite a lot of discussion. But it has really been, as I say, accelerating towards a pretty sharp defined greenness in terms of enforceability, and data issues towards the right. And in broad terms, you’ve got Paris, you’ve got everybody agreeing globally, that we need to sort out ESG. A couple of years ago or so you have a toughening in regulations and lots of jurisdictions issuing their particular take, with of course, different attempts at data definition as well. Then more recently, the last set of words on the slide tightening up around codifying that, finalizing such things and how to make it scaling up how to make it possible to actually industrialize the things that are being requested, and the start of reporting. But if I dig into some specifics, I want to pick out a couple around EU UK, which may be something that you guys were from the US perspective, I can can reflect upon. The UK, FCA, for instance, in 2021 couple of years ago, picked out their ESG strategy. And it’s something that was issued to the industry to think about, and then made super simple. And it’s five T’s for theme, lovely transparency, trust, tools, transition and teams. So let’s make it clear, transparent. Let’s be trustworthy, let’s use tools, appropriate tools, let’s think about transition towards this new cultural target. As I say, it’s a team effort. So there are a number of things around that’s been updated, actually in November 2022. So quite recently, the FCAC history strategy now adds rather more obviously, the S and the G adds the question of how to achieve a just transition. And by that, we just mean the socially appropriate transition. So, very much still the weak bit of it we talked about before, a little tiny quote here, I’m gonna just pick out for you, for this one little companies and consumers are increasingly looking beyond climate change to they’re also considering the wider environmental issues such as nature and biodiversity, as well as social and governance issues such as diversity and inclusion, the living wage, fair taxation and supply chains. There is growing attention on the need for quotes just to transition, which considers the social consequences of a shift to a net zero economy. So, you’ve got a much more cuddly kind of approach or rounded approach to that than perhaps necessarily one that’s just stuck on the climate aspect of it. It does really split another poll earlier, it was “all of the above.” But quite a lot of the things that I think I’m hearing here, almost without or not preceding resistance, it’s for the greater good, it’s for the social good, It is not so that I can just get away with a nice marketing spin and say “sale closed” to the wind and hopefully get away with it. There is a buy-in to this and the regulatory emphasis around its conduct. It’s going against that conduct. It’s the social content being given a boost. Now risk of harm is common language around that and that risk of harm thing that’s coming out now, again, towards the very bright green end of my arrow. Very recently, in fact, two or three days ago, 20th of March, the FCA issued something which was poking rather firmly at the issuers of benchmarking data, to look at the quality of that, because it was considered to be particularly poor. Obviously, it leads us to potential for mis-selling, it leads to all manner of questions around labeling, which is beginning to gain a lot of issues not just incomplete, not just in finance, of course, but around manufacturing. How do you label things beyond the sticky that goes on the side of your white goods in the kitchen? Through the weather we’ve talked about? Christine, you’re talking about your car, your transport fleet?  I do have a little slight remark about tires a little bit later to make but how do you get to the grains of that data? And how do you score it in such a way? This is all becoming metrics that people want to know about now. So the emphasis is you’re getting towards practical implementation as you get towards the right hand side of that grid.

Kayvan

One thing I was going to ask you as we’re heading on, we just heard from Christine on greenwashing. On one aspect, are you seeing a similar positioning happening within companies there and maybe in this context? It’s really the heart of the question that was raised. Is this a bunch of virtue signaling, or is this actually substantial? Are we overcomplicating an already complicated situation, or is it a must do for an organization? Would “greenwashing” be the best way to discuss this?

James

I think the green washing thing is very, very real. Again, this is extremely recent. This is literally yesterday. Now the one that I’ve got on the screen right now. It’s getting a lot of traction, the green claims directive. And again, as I say, that’s beyond just finance. It’s a European Commission thing rather than EBA. European banking authority specifically, companies have found extremely sophisticated ways to engage in greenwashing. There’s the gnome again, we have found that more than half of environmental claims we examined in the in the EU are vague and misleading or unfounded. So, this is the move from claims to facts that I mentioned, perhaps in the in the earlier statements and you’re looking at, you’re looking at, okay, it’s not just finance, but it speaks to how the taxonomy the finance need to report that they used to score, it eventually will score into capital or liquidity charges or how it appears and disclosure under ICAPs. Under the individual, that sort of individuals supervisory reporting that you want firms has to do. So how to substantiate these. So we’re looking at all the bio, the ICO the energy, sufficient stickers, all that sort of stuff. Things that have been claimed to have been approved when they’re not these are all being driven out there under this piece of legislation. That’s the intention. And everybody that’s an actor in that is involved that might be a producer, consumer and investor and a regulator with penalties now. So we’re now looking to codify behavior around greenwashing and to try and give it a taxonomy so that it can be identified to be at fault or not, otherwise, you can issue fines and penalties. So it again is a huge challenges about what it actually means. But this is absolutely a strong intent with with legislation on the table now to be debated by the European community and implemented.

Kayvan

That’s what we talked about earlier, right. Quantifying, grading will kind of exclude or  have a much better way of quantity. With quantification grading, I think this type of thing would be a little bit more difficult.

James

Yeah, they’ll find a way.

Kayvan

Back to Christine’s comment about having to report to be able to substantiate data. Data that substantiates as opposed to trying to simply have a bunch of checkboxes, I would imagine.

James

Almost in the next maybe next slide. I’m not sure I think yeah, this is this one probably gives you a flavor of why I mean, what I mean by the UK, Europe and I there’s still a lot of commonality of what I mean by find a way and I’d be fascinated to know what Christina makes of this. This is all about what I call head teacher now. I did something the other the other day with the UK entirely UK perspective on head teacher is talking to you. The regulator’s are taking a very directive approach to senior management responsibilities. Now around many things. You’ve been called you’d be seen in the school office, you should consider where the risks of harms are present in your firm and adopt strategies for mitigating them we will consider whether your governing bodies and senior managers with accountabilities have taken appropriate actions. And if not, there are going to be consequences. So this is all pretty directive language. Last paragraph on there you see, we expect you you’ll see the membership and board to have carefully considered the message you said, I want to clipped out there is just a couple of examples. And again, in this flurry that I mentioned on the green end of my arrow, there is a host of what we call dear CEOs over here, letters sent to the CEO by the regulator, or Dear AFM dear authorised fund manager, chair, that pretty much calling out on four or five pages, not hundreds of pages of regulation, exactly what’s expected of the senior management. And that’s that’s the sort of stylistic approach that the EU and UK while especially UK regulators are having at the moment around this, they will find a way of enforcing.

Kayvan

Which may resemble the financial but in this case, reputational damage to that. So, what are the challenges in terms of having ultimately the build-out of a compliance dashboard as it relates to ESG? What data challenges are companies facing?

Christine

 If we can go back to that last slide. It seems if you’re sitting in the US, you’re like, “Oh, those people over in the UK and the EU, they’re so strident.” What I want to say is that in the US, there are these exact same pressures. It’s maybe not articulated like this. I just want to point to two or three things for the senior management teams that publicly traded companies or public companies. There’s always been the Caremark doctrine under Delaware law, which required boards to set up systems to monitor risks and to manage them. But in the past three years, the amount of liability for boards and now extending to senior management teams for not setting up and taking adequate actions and setting up systems to monitor risk is increasing. Similarly, the SEC has been issuing new rules including ones around getting back like the call clawing back, compensation awarded to senior management teams. For or anything that might trigger a restatement which some of this data could and they’ll take back three years worth of incentive comp for any restatement as the entire senior management team. So I think that this thrust around accountability for statements and truth, it’s a similar, it’s absolutely a similar environment, it may not be quite so crystallized, but it exists as well in the US, and it’s something important to be aware of.

Kayvan

Interesting. Yeah.

James

It’s particularly the only kind of tool available in some contexts where you’re looking at a qualitative enforcement, if you will, rather than just a strip of a capital measure or something like that. It’s about behavior, right? Ish. When you start getting to, and I’ve only put the picture of the tire on there, because it was fascinating to hear Christine talking about your fleet, you know, how do you measure? Yeah, this was something like that. It was actually mentioned by one of the regulators, I was looking at the BIS the Bank of International Settlements innovation webinar recently about their own innovation processes. And they were seeking something again and the guy called out what it was. In his view it was perhaps the either the Terek hangry being polite nature of the kind of data that might be collected. And I just thought for some whimsy, it’d be worth putting a picture of how you measure rolling resistance up there, but there are many things, it’s sort of links to the fact that you’ve learned to what is in fact, the total, you know, the total retire rolling tiger coefficient of your fleet, which is possibly something that Christine’s had to measure or are going to have to measure? Yep. And that all feeds in and those are the silly ones, obviously, you’ve got the much more substantial ones linked by both in terms of the reliability of the data you’re getting from, from a benchmark provider, and the DC portfolio that you’ve got under, under your management could lead into an ESG dashboard of some form. But what I wanted to redo and the reason I put the dashboard up there, I’ll stop talking in a moment, and I’m sure Christine wanted to say something, (I can see that she wants to say something) is that the the dashboard is something you ultimately need. Somehow as a senior management. You need to know how green you are. And by that, I mean red, amber green, not green, as in the other bit of green that we’ve been talking about which resurrects with respect to the unknown. But how green? Are you in terms of how cool are you? How good you are? How close to being in compliance? Are you across the firm? And we’ll talk about tools a bit later about how reg tech tools perhaps can assist firms in achieving that. So, my dashboard illustration was sort of a two-edged thing, It was both. Yeah, you could get this data to fit into a score of some form, if you could figure out what and how to measure. But I think also there’s a need for compliance dashboards generally, but I’ll talk about that a bit later.

Christine

And all I would say is, if I was making a face, it’s because I hope that what you hear me saying is, start small. Start certain. Start with what you know and begin to track those 450+ ESG measures. I know that at my company, we would not be able to handle that. Even at Fannie Mae, we were not able to handle that. We really were very thoughtful and careful about what we knew and what we could track. We concluded that we wanted to be so certain and confident in that which we measured, that we would take any hits that might come our way for not doing 450+ and picking only 50. Because we felt like That was all that we could actually make. I don’t remember if it was 50 or not, but be thoughtful about the risk you’re signing up for when you try to be too bold and audacious in measuring and collecting and calculating. Because there are formulas like this one that you may never have used before.

James

Yeah, I think there’s a point there. I mean, this is really reflective of (and thank you for that Christine) the importance of knowing what you can measure. I am wondering if I wasn’t on the November webinar, the word proxy was used, it’s not been used yet today. I think we’re moving away from that. Back at the end of last year, there was a discussion, I believe. If you can’t find it, you’re gonna have to use a proxy. So, if you don’t know what the energy efficiency is of the house you’re lending to, then you use a proxy, the proxy bids the district or the postcode or zip code, whatever it may be. You’re now moving towards a situation where the data may be bad, it may be inaccurate. And to the point of the question that’s been put on the chat, it may have been sold to you by a vendor who thinks they’ve got good data, but now you’re also looking towards a convergence of standards that might allow the data to be more or less, eventually reliable data. So, as you see things like the sustainability Academy standing board just to say that CSPs move towards data and the IASB the international Stainability Standards Board and all of these things under IFRS, or the US GAAP equivalents, you start to get hopefully a destination, the EU’s, taxonomy, different taxonomies where they become cross relatable and reliable. You can then get a measure for these things and you start saying goodbye to proxies and hello to real data. And it becomes “I don’t know quite when that is.” But that’s it. That is worth buying something to the point in the gentleman’s question.

Kayvan

100% plays a big role. You guys talked about greenwashing quite extensively and we found that both the OCC and FDA are pretty serious about taking it head on, as Christine mentioned, standard, controversial but equally as direct at organizations. You can see the pattern of enforcement actions that we’ve been tracking in a compliance AI study. Yes, it’s environmental, but when you scratch the surface, it’s all about misrepresentation of data. You see misleading claims, misleading statements, misleading marketing information. In some cases, specifically around environmental objectives that were not met or went deep enough. But this enforcement action onslaught will continue. Do you guys have a perspective on where this is going to go? Are we seeing more and more of the power of organizations that can do these types of applied steps of enforcement actions being taken away from them? Are we seeing them being more empowered towards this type of enforcement actions?

Christine

Well, the lawyer answer is it depends, right? <laughter>

I think that you see in the US whether it’s the Senate issues or any other set of issues, that it is truly state by state. I think that you see there are state actors who are very eager and ready to take action if they see something that doesn’t match the policy beliefs they have. Then they will gain a personal reputational benefit, and benefit for those organizations that they’re connected with if they are a little bit more aggressive. So, I do expect to see more both at the state and local levels around all of this because these are community issues, really. I do see that the SEC has been reluctant to issue their final rule, because they’re concerned about liability and risk around those third-party emissions. They clearly do think that this is a social good to create more disclosure, with more disclosure will get better quality data and more consistency, and something to benchmark against which will advance the ball on the laudable goals that ESG represents in terms of improving our environment. The corporate footprint with with respect to the environment, social and governance. So, I think it’s a good thing. I do think it’s going to be really noisy and somewhat political. And that’s unfortunate, because I don’t think it needs to be, but I think it will be in the US.

Kayvan

And so the backdrop is: you could achieve these goals, because you want to be better stewards of your business, you could achieve these goals because you want to leave a better planet, on the other side, the operational aspect. And so, coming out as an organization trying to transition into operationalizing this practices, James, what do we recommend in terms of call to actions?

James

I am coming a lot of this from I should have said it perhaps in the introduction. I’m not an ESG specialist. I’m bit of a generalist around the application of technology to regulatory problems from the firm’s perspective, as opposed to from my supervisor’s perspective, but I have a sympathy to both. Through this, I think in terms of what can be automated usefully and what could potentially assist the process of operationalizing your alliances with this challenge, as opposed to just simply managing to just survive. How do you get behind it? to operationalize it, in other words, so that implies a degree of automation. And you’re up to the challenge and the Juglans question are, what do you automate? What do you buy? What data do you get? I’m actually thinking a little earlier than that, which is around how do you know what you must do in the first place? And this has really had a big input into defining the obligations, defining the requirements, defining your firm’s response. Defining what to go back to indeed, Compliance AI’s own perspective around horizon management. What do you need to do, to know what needs to be folded into your compliance response against ESG. How do you report that? You know, how do you know if you’re compliant internally to the dashboard I talked about earlier. This all implies a level of data that’s required. So, what kind of data do you need for reporting perspectives? What data do you need to gather for the ability to demonstrate compliance as I put on the slide? One, you’re not gonna be able to go back, right? You can’t go back and rustle up some board report or a Compliance Committee memo that doesn’t exist, if you’re challenged to so do after a while. So, there’s a lot of thinking required strategically as to what it is that’s required to operationalize and then keep rolling that overall process through so that a firm can know what it needs. That’s the point at which you’d return you respond to vendors. I don’t mean just the data vendors question. I think it was pushed around, the question of how you operationalize dashboards. Again, specifically, the green dashboard I talked about earlier. It’d be nice to see some level of internal reporting that gives senior management a degree of comfort. You know, red Amber green? Are we green? I don’t mean green, as in the Gnome, but red and green as in how close to being compliant? What’s going offline? Are we losing track of data quality in respect of a certain area? Is that data quality benchmarking data? Or is that data quality? Our own internal compliance reporting? Very qualitative? How do you measure it? As a senior manager? How on earth am I going to keep track of all of this? I need decent tools to do all of that to operationalize it. And the last point I’d make around this: is the scenario testing required? So you don’t know what’s going to come at you yet? How can be talking about ESG. But through these mixtures of tools, whether it’s change management, data quality, dashboarding and scenarios, you can handle the next thing, I think, possibly was hinted at in the title of this webinar, right? What’s next after ESG it might be the close shave, we are having not have just had, but are having in respective banking resilience at large, right? That probably was not considered a rocky it was all been flaky with cost of living with fuel crises, with wars with whatever else is, but only just recently, have we found that ISIS exceptionally thin. So, by looking at scenarios around that, one can hopefully have, again, a much more resilient operationalized best practice and respected risk management of compliance challenges. Why do just ESG? You have to really think about what’s required before you start buying or doing anything. Although I do love what Christine said earlier. Again, start early, start small start and with something you can actually achieve. I’ve not had to do it myself. I’m an observer.

Kayvan

Yeah. You mentioned that companies can look back. But Christine, you mentioned regulators go, how many years back? Could you say a company can look, the SEC would look back three years or so?

Christine

Oh, it’s the new regulation or law that permits the SEC to clawback compensation from senior management and people who are involved in making statements that investors relied on is three years of compensation.

Kayvan

All right. Speaking of measurements, we heard James mention “measure, measure measure.” Where do we start? What do we measure Christine? What is the call to action or advice would we provide to organizations? Would you provide organizations with symptoms of what to measure on the compliance side?

Christine

I think that’s what I would really want to know. I think my whole message is core principles. Don’t treat this as something that’s wildly different from everything else that you’ve done. Because at its core, you’re going to need to make sure that you have alignment and buy in. This is the practical advice for somebody who’s sort of sitting at a company, from the top of the house, from the board from the management team, because you may need extra tools, you may need extra help. But it’s not that you can’t start counting things and doing the compliance without making sure that everybody’s aligned around the strategy. These are the five most important things for us. And in order to be able to prove that we are truthfully saying these great things, we want to be able to say “we have to do this and that” which we’ll be measuring also at my current company. We think a lot about safety and measuring safety is a hard thing to do. So, I would say you can look at these are some of the great things that you want to make sure you’re doing. My go to tip is look at things that you are already reporting on to the federal government or to state governments because presumably you’ve set up systems and processes to make sure that that’s true. Leverage that data to report and roll it up and think about some of these other things and then think about where you want to go because that’s already being tracked. Certainly having established both for your internal company and for your suppliers. We’ve talked a lot about the third parties who are in the mix. And it is, to me, the same as cybersecurity. Third parties are often a big source of risk, or a big source of something that needs to be managed but is very difficult to do. Supplier codes of ethics is a way to try to start to get at that. Having a diverse board of directors so that people ask different questions and challenge things differently and making sure that you’re really being equitable and inclusive for employees. But again, I think that it all starts by having a cross functional group really consider as an organization, what are the right things to focus on? How are we tracking them? Do we have sufficient resources to track this? And if not, what are tools that we could use to help us get there because it could become an existential problem for an organization, if it’s been if it’s not supported by the data, is it really going to be everything here?

Kayvan

Yeah, it sounds like these are what to measure, not how to measure it. And then hopefully, in future webinars, to delve into not all seven, but maybe top three, top four that you guys would recommend it really provide some hints and some advice on how to measure some of these. Sorry, go ahead. James.

James

Say we chatted, (I think at some point, it may be new in the back of my mind) around measurements of things like: how many times you’ve been fined? Or the number of other measurable things that give you some kind of a fix on the trajectory of your governance compliance, for example.  I think the other thing I wanted to mention on this slide about being so difficult to measure. But again, reflect on what I was saying earlier about culture change that’s been pushed so heavily by the UK regulators. How do you know if you’re on a trajectory that is towards an improved culture? It’s kind of close to the number of times you’ve been fined by or later or received a red letter. But it’s also an internal thing, isn’t it? Right? You shouldn’t be having conversations with people who suddenly go, why are we doing this cog rubbish. It’s something that’s not just a whole lot of fluff. That’s a political point. I don’t know whether it is or it isn’t, but you would hope that there isn’t, but how you measure that? I don’t know. Very tough, you know, but at least you kind of know you’re going in the right direction. If as a firm, you’re not hearing watercooler talk that is objecting to the whole initiative of achieving the greater good rather than just scraping by from a tick box perspective.

Kayvan

Yeah, absolutely. I think that, from one side is keeping companies in the know and informed about the various rules and regulations, like the ones we’ve heard today, both from the FCA, the PRA, and SEC (and other regulators internationally). Be in the know. Know what’s changed. At Compliance AI we’ve now introduced, as of the past year, specific classifications around environmental social governance-related investments, rules and regulations and asset management. The impact on environmental, social governance related assets and investments. And we’ve seen more and more of an interest from our clients and our partners in having what James introduced a little bit earlier( in terms of a dashboard). What is the best practice? What am I benchmarking myself against? And what is my maturity in terms of achieving the goals? As outlandish as the timelines are. Christine mentioned, I think you’re talking about long term, Christine. I think you suggested that 10 years or 15 in your “what is the timeframe that you’ve established for your goals?”

Christine

We have one that’s in 2030. We have some really long term headlines, but I think this is where having dashboards, the data comes in. There is no way you’re gonna build to this really audacious-like, “we’re going to reduce emissions by 50%” in 2030, if you are not already tracking today how you’re getting there.

Kayvan

I’m gonna put you on the spot and ask one of the questions that came in: “has ESG been codified as a whole within the CFR framework, or do you think that’s something that’s upcoming?” I know that bits and pieces of it, the G part from governance, have seen that diversity? I haven’t seen that be codified specifically, but I’ll ask that question from you. Specifically, iare we at a point that it’s completely well established? Is that in the works?

Christine

I think it’s the same principle that I was saying about how a company will think. I would think that you could look, you could catalog and resort to a tremendous amount of environmental governance related, employee/employment related or safety related regulations. All of the “alphabet soup” of regular federal regulatory agencies. And they would actually sort under E  S and G, which is why I’m saying you can leverage reporting that you’re already doing for those to deliver against this is what we do, in a central place. Yeah, exactly. There isn’t yet, there’s not another central place, the SEC is sort of stepping into that space, to start talking about it when they talk about climate change. That’s something that’s different. But I think, even at the federal level, there’s conflict over who owns all of this. So more to come.

Kayvan

But there’s quite a lot already advocating the classification approach versus this rule of this regulation could be broadly all over the place, absolutely. And started by James, on the enforcement action set, the measurement, like, from our side really, truly excels you, how serious are these regulators about these rules? And as you mentioned, Christine, how do I then identify the commonality in terms of the types of violation for that we offer. Obviously, an enforcement action reporting, and in our next ebook quarterly publication we provide, we’re going to put a heavy emphasis on ESG related rules and regulations looking at a probably a six-month retrospective on what has transpired in terms of those regulations. This type of automation we feel is necessary, but also, last but not least, the ability to then report, I’ve been reviewing regulatory changes related to ESG. I have a very clear definition done or have plans to establish those definitions and be able to produce that both your board and of course to regulators and auditors alike. So, with that, we’ve answered some of the questions that we’ve received, I have another one, which I will post to the team here, the more efforts consumed on planning effectively, the less measurement tools, you need to control these students that they’re asking for your opinion on this James.

James

It’s a bit like preparing for declaration, isn’t it? The more you can pay before you start putting the paint on you, it may be an awful lot of work upfront to get it right. But I would surely think it’s a worthwhile investment to determine what it is you’re trying to achieve before you try and achieve it.

Christine

And that’s why I like to think of it as a strategy to make a better company and a better business and less as compliance or regulatory. There’s lots of regulatory and compliance aspects to it. And we talked a lot about the proof points you’re gonna need to have in the way to be able to achieve those goals, but it is a strategic choice. And so, if you think about it in that frame, then people will align around what those aspects are, and what are the right things to focus on.

James

To the particular point of the question, as the gentleman says, the list of less measurement tools you need, as a consequence, the less measurement tools you will need to take control over ESG. Again, quite right, we try and avoid the duplication of what it is you’re trying to generate by way of internal reporting. If you can design a proliferation of stuff to look at. It’s just given me a nightmare.

Kayvan

That’s my biggest takeaway. It sounds like that readiness, collecting data you may already have and the fact that you may already be able to present the report accurately and quantify. Then hopefully, it will measure up against the rules and regulations, is really the approach you’re suggesting today. Very good. Well, I want to thank both of you for providing your advice and thoughts and guidance on this. We’re going to continue the series on ESG. Please be on the lookout for an on demand version of this Ronjini. Thank you so much for helping if you want to provide the next step, so be great.

Moderator

Yes, thank you, everybody for joining us, just as Kayvan mentioned, this is being recorded. So it will be available on demand early next week. You’ll find it in our compliance AI regulatory trends blog, and this will be sent out to everybody who registered today. So thank you so much for joining us. And thank you so much James and Christine.

<ALL>

Thank you. All right. Bye.