Environmental, social, and governance risks escalate
ESG started gaining steam in 2021, and all indications are that it will continue to strengthen as we head into the future.
ESG is vital for financial institutions to monitor and address because it encompasses various potential risks, including climate change, social inequality, and data privacy. Failure to confront these issues can negatively impact a financial institution's reputation and business model.
According to a recent survey, more than 76% of respondents say they are more likely to do business with a company that supports environment, social or governance issues. As the public continues to prioritize products and services that emphasize ESG, financial institutions should consider conducting ESG assessments and setting goals related to performance. Financial institutions should also develop policies and procedures related to ESG compliance and ensure their employees are trained on these policies.
Data privacy comes to the forefront
Data privacy will remain a significant issue for financial institutions, as risks from recent regulatory actions, such as the General Data Protection Regulation (GDPR) and the California Consumer Privacy Act (CCPA), come into play. Financial institutions will need to comply with all applicable laws or risk serious penalties. The GDPR, for example, could impose fines up to $23 million or 4% of annual global revenues for financial institutions that fail to follow emerging privacy regulations.
To help mitigate data privacy risks, financial institutions will need to have a data protection plan in place. This plan should include procedures for handling customer data, including policies to ensure that only authorized employees can access sensitive information. In addition, providing employees with training on data privacy compliance is also key.
Cybersecurity, the risk that continues to grow
As cyberattacks become more sophisticated, cybersecurity risks will continue to increase. Financial institutions need to be prepared for these risks by implementing strong cybersecurity measures.
At a minimum, these include having a firewall, encrypting data, and ensuring that only authorized employees have access to sensitive information, but the continuously changing nature of cybersecurity requires more robust policies and procedures.
In turn, financial institutions will see costs rise on security spending as they initiate more comprehensive staff training and hire more sophisticated vendors with specific expertise in cybersecurity. To ensure success, financial institutions will need to build a robust vendor management program that includes regular audits and security assessments.
To safeguard against the ultimate cost, financial institutions should consider investing in cybersecurity insurance to protect themselves financially from cyberattacks.
Facing risk head on
Financial institutions' compliance risks are varied and complex, but preparing for them now, can help mitigate the damage from these dangers. Implementing strong cybersecurity measures, conducting ESG assessments, and training employees on data privacy compliance are crucial steps that financial institutions should take now, to help ensure that they are compliant with all applicable laws and regulations and prepared for future compliance risks.