Financial Services Blog

Environmental, Social, and Governance (ESG) regulations are emerging with speed and force, both within the United States and globally.  Indeed, as we highlighted in Accenture’s 2021 Global Risk Management Study, 77% of risk leaders believe that complex, interconnected risks are emerging at a more rapid pace than ever before, and ESG-related risks are no exception.  Implementing an ESG Center of Excellence (CoE), directed by the compliance function and integrated seamlessly across the enterprise, may help public companies navigate this quickly evolving regulatory landscape.  Building on the first installment of our ESG Risk and Compliance blog – “Mandatory ESG Disclosure Rules are Coming: Here’s how Public Companies can Prepare their Compliance Functions to Avoid Regulatory Crosshairs” – we discuss the role CoEs typically play in the compliance function and how a well-designed and operationalized CoE may enable companies to become industry leaders in ESG regulatory compliance.

What is a Center of Excellence?

CoEs stimulate companies to address specific regulatory and risk priorities using proven best practices, research, and skilled teams.  The purpose of establishing CoEs is to improve enterprise outcomes by strategically building capabilities and using oftentimes limited resources and personnel.  A few of the many advantages of implementing CoEs include:

  1. Developing approaches, frameworks, processes, and tools for applying relevant regulatory experience and key skills;
  2. Testing, adjusting, and rapidly iterating on approaches by using design thinking and agile methodologies to improve the internal and external customer experiences;
  3. Defining and utilizing technology to drive operational effectiveness, change control adoption, and increase predictability;
  4. Assessing the value of different approaches to maximize investment returns, speed to issue resolution, and benefits over time;
  5. Allocating resources transparently to other enterprise groups, as needed, using a skilled resource pool and providing direction and a designated space for employees to build and maintain skills and industry know-how; and
  6. Repurposing assets and existing infrastructure to remediate new issues and applying learnings across the enterprise.
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Common Centers of Excellence for Compliance: AML, KYC, and Data Privacy

Companies have historically relied upon CoEs when dealing with emerging technologies, regulatory requirements, and risk considerations.  Having a dedicated team of industry experts at-the-ready to prepare for, and respond to, changing market demands and operating requirements significantly reduces risks while also strengthening business continuity.  In particular, the compliance function has created CoEs dedicated to AML, KYC, and data privacy, as these areas have seen an increase in regulatory activity and event severity.  Over the past decade, companies have scrambled to respond to money laundering, economic sanction, and data breach activity to avoid regulatory fines and operational and reputational risks, among others.  CoEs provide companies with the necessary infrastructure to strengthen their compliance function and the overall enterprise, thereby detecting and preventing red flags before they occur.

Why an ESG Center of Excellence?

ESG CoEs may empower companies, both large and small, to become industry leaders in the new frontier of ESG regulatory risk.  Accenture’s 2021 Global Risk Management Study revealed that 41% of risk teams plan to sharpen their focus on climate-change regulation, which is on top of the 49% that are already focused on ESG.  With an ESG CoE, companies may prepare for and adapt to changing regulatory and customer demands by utilizing targeted expertise and innovative approaches to ESG-related issues, including mandatory disclosure requirements, GHG emission standards, pay equity goals, and key stakeholder demands.  Indeed, ESG CoEs should be considered by companies regardless of size because they may be scaled based on the company’s resources, jurisdictions, products, services, and risk exposure.  That said, to realize the full benefit of an ESG CoE, companies should be strategic in designing and operationalizing it.

Designing an ESG Center of Excellence

 To validate that an ESG CoE functions effectively within a company, leadership should consider the intent and operational design prior to launch.  A dedicated research and development department should be created within the CoE to continuously work on innovation, data and market analysis, and asset development.  The CoE team should be focused on ESG best practices and regulatory requirements – including but not limited to the U.S. Securities and Exchange Commission, the Department of Labor, the Environmental Protection Agency, and the Federal Energy Regulatory Commission, as well as the Sustainable Finance Disclosure Regulation and the Corporate Sustainability Reporting Directive in the European Union – but also have cross-industry and cross-functional experience.  Additionally, the ESG CoE team should include industry leading ESG assets and accelerators, which may provide essential differentiation in the marketplace.

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Operationalizing an ESG Center of Excellence

Launching an ESG CoE within a company may be broken down into four components:

  1. Clearly Defined Goals: The ESG CoE is overseen by the compliance function with clearly defined short- and long-term goals to utilize best practices, ESG expertise, data and analytics, and industry experience across the enterprise.
  2. Dedicated Resources: The compliance function executes these strategies quickly and effectively with dedicated ESG resources, training, and enterprise understanding.
  3. Continuous Operational Support: The compliance function relies on the ESG CoE as much or as little as needed to strengthen the company’s ESG capabilities.
  4. Adaptation as Necessary: As the ESG regulatory landscape evolves, both in the United States and globally, the CoE steps in to adjust the compliance function’s and / or enterprise’s strategy in real time, either proactively preparing for change or immediately responding to it.

With the ESG regulatory compliance landscape full of increasingly challenging hurdles and pitfalls, companies would be wise to design and launch ESG CoEs sooner than later.  Like those dedicated to AML, KYC, and data privacy, an ESG CoE may maximize ESG-focused expertise and innovation, while at the same time minimizing exposure to operational, regulatory, reputational, and other risks.  Companies that ignore ESG opportunities and the regulatory pace of change may be ill-prepared for the future, compromising overall survival.

Stay tuned for the third installment in our ESG Risk and Compliance blog…

Aaron Mendelsohn

Aaron Mendelsohn

Principal Director, Risk & Compliance

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Olivia Jones

Strategy and Consulting Manager – Digital Risk and Compliance

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