Breakdown: Understanding the Compliance Tech Stack

Compliance –whether environmental, labor, data privacy or other– is now an issue of tremendous importance to businesses, and a core part of their day-to-day operations. Remaining compliant is so important that more and more companies are turning to software to solve the problem.

But it is rare –and perhaps not very advisable– to have a single solution for matters of compliance. That’s why many businesses have what is known as an “ESG tech stack” or an “ESG portfolio”; a collection of software solutions that allow businesses to keep track of their documentation, environmental footprint, etc.

How does this ESG portfolio look? What sorts of technologies make up it?

Automating: Compliance advisory used to be a job mostly for consultants, but the emergence of software solutions has allowed companies to automate that process too. 

• According to Thomson Reuters’ The 2023 State of Corporate ESG, between 55% and 59% of ESG-related spend across key areas is already going to software solutions, the vast majority of them coming from third-party providers.

• We’ve reported on a noticeable increase in the deployment of comprehensive ESG platforms in business.

Dashboarding: One of the more popular aspects of the ESG portfolio is the use of dashboards. These allow businesses to keep an eye on any metrics that are relevant to compliance.

• “They [businesses] want to make sure they have a standardized dashboard or some way to consolidate metrics of each pillar of ESG,” explained Yazwand Palanichamy, Senior Research Analyst for Software Selection and Vendor Software Procurement at Info-Tech Research.

• “Within the environmental pillar, there may be some metrics specific to green or carbon accounting, or Scope 1, 2 or 3 tracking,” he added. “A lot of organizations want to be mindful of resource utilization, wastage and on how they can track that across the supply chain.”

In finance: As one of the more heavily regulated sectors in business, compliance software is becoming increasingly popular among financial advisory firms.

• “Financial advisors need to assess/capture a client’s ESG preferences; research investment options/build a portfolio aligned with the client’s preferences; and report to the client how the portfolio performs on those preferences,” explained financial advisor Gabe Rissman.

• “Each part of that process must be documented. Different jurisdictions require different amounts and types of documentation based on the regional regulatory differences,” he added.

Proper data: Data is important to remain compliant. As such, software that allows for proper data collection is pivotal in any ESG portfolio. 

• “Key features of such software include reliable data collection from various sources, benchmarking against industry standards, performance tracking, compliance management and emission monitoring,” commented Sunil Kansal, Head of Consulting and Valuation Services at consulting firm Shasat, in a previous interview with NSAM.

Location agnostic?: Location doesn’t seem to be a defining factor when it comes to providers of ESG compliance software. What matters, however, is data residency.

• “There’s not much of a preference for offshore or onshore or nearshore. What I’ve found is a preference for data residency,” explained Yazwand Palanichamy. “In APAC, for example, they [clients] want to have vendor supportability aligned with their hours of operations. Where are data centers located as well. A lot of clients handle PII [personal identifiable information], so data residency is critical.”

• “As long as the vendor is able to provide some compliance or regulatory assurance to the client about where the data is being hosted or triaged, that’s usually more than sufficient for them,” he added. “There has been a preference from North American clients to look for North American vendors first.” 

AI for compliance: Like in many other areas of business, AI is expected to drastically improve compliance software.

• Environmental monitoring publication AWE International, for example, sees AI making materiality assessments –which are a must in mandatory reporting– more cost effective. It also expects betterments in risk analysis.

Money flows: Global ESG assets (investments) surpassed US$30 trillion in 2022, according to a study by Bloomberg Intelligence. That same study expects ESG assets to surpass US$40 in value by 2030.

NSAM’s Take: It’s always interesting seeing the ways in which software arises to solve a problem. We’ve been reporting on the relevance of ESG in business for a while, so it’s not that surprising to us that providers of IT solutions would come up with a whole portfolio of tools which ease regulatory headaches.

Also interesting are the ways in which the intersection of software and compliance consultancy might result in the hybridization of certain professional profiles, or even in the creation of entirely new ones. Previous interviewees have told us that more and more compliance officers are feeling the need to become tech savvy, and an increasing number of engineers developing these sorts of ESG portfolio solutions see the need to be at the very least acquainted with relevant regulatory frameworks.

The incorporation of GenAI into the ESG tech stack promises much too. Legal professionals have reported an increase in their productivity when incorporating ChatGPT and similar tools into their workflows. And OpenAI’s product has for more than a year been regarded as intelligent enough to get a passing grade in law school tests.

We can’t tell about the accuracy of the numbers for the “ESG market”. What’s obvious, though, is that ESG compliance is becoming increasingly relevant for business operations, and in the age of automation and software solutions, the first response of many business leaders will be to solve their problems with technology.

In fewer words: the market’s open and might be soon swarmed by customers.