In our previous post, we had an introduction to ESG management and an overview of its connection to compliance. In this article, we elaborate on the importance of ESG management readiness of your company’s compliance team.
As companies increasingly focus on sustainability and social responsibility it is important to ensure that their actions align with regulations and ethical standards. Today it is still common that companies lack the experience and skills to manage the ESG issues and navigate the increasing and changing regulatory demands and intensified regulatory scrutiny that comes with them.
Compliance function today ensures that companies adhere to relevant laws and regulations and helps them identify and address potential risks and ways to manage and mitigate these risks. This should be the same when it comes to risks related to ESG because it helps companies build trust with stakeholders, investors, customers, and employees, and also contributes to a more sustainable and equitable future.
By including a compliance team when preparing and creating ESG strategies, companies can demonstrate their commitment to responsible business practices and potentially gain a competitive advantage in the market because compliance experts are already familiar with the complexity of global regulatory requirements and multi-jurisdictional programs.
Compliance helps to mitigate risks associated with non-compliance, such as legal penalties, reputational damage, and loss of stakeholder trust. Additionally, a robust compliance framework can foster transparency and accountability in ESG reporting and practices, enhancing the credibility and effectiveness of an organization's sustainability efforts. Overall, compliance serves as a cornerstone for integrating ESG principles into business operations and promoting long-term sustainable growth.
In theory, it is all clear and we understand why and how ESG and compliance are connected. When it comes to practicing and implementing ESG there may arise many questions.
In general, the top challenges for Compliance and ESG are:
When to start?
How and from where to start?
How should the Compliance Team tackle ESG issues and create the company’s ESG strategy?
Until now compliance teams have mainly focused on risk management related to AML/CTF/KYC. Where should ESG knowledge come from?
When including ESG in the compliance framework, their workload increases, should new people be hired?
We plan to answer all these questions in the following posts and guide you in navigating this relatively new ESG field.
If you ask “when to start” and as an SME think that the answer is “not in the near future” because the Corporate Sustainability Reporting Directive (CSRD) which will soon (2026) enter into force will apply only to large corporations, then partly you are right. CSRD will at first indeed apply only to large corporations.
But when looking at the bigger picture, it is already the time to start including ESG matters in your company’s strategy. It is currently not the regulator, but it will be your investors, suppliers, clients, and business partners that will ask you about ESG requirements and how your company complies with them.
For example when opening a bank account or applying for an investor loan. Especially for CASPs, it is now the perfect time to start including ESG in your strategy because, with the MiCA license application, the ESG topic also needs to be tackled. Read to know more in our post “The Imperative of ESG in MiCA”.
How and from where to start and who will have the knowledge to be responsible for the company’s ESG matters? As ESG and AML compliance are linked, commonly, the person is someone from the compliance team. Of course, achieving compliance with AML and ESG requirements can be a complex task requiring a comprehensive approach.
Stay tuned to our next post where we discuss whether the ESG tasks in your company should be assigned to someone from the compliance team (along with other compliance tasks), should you have a dedicated person (ESG Officer) that is responsible for ESG matters or would the best solution be to outsource all ESG related services.