• Gerry Zack, CEO Society at Corporate Compliance and Ethics® (SCCE) & Health Care Compliance Association® (HCCA) and Dina-Perla Portnaar


• 02.03.2022 02:30 pm
#compliance #ESG

Environmental, social, and governance (ESG) is an important topic for compliance professionals. ESG is not just something that publicly traded companies need to address, but also supply chains and all sorts of businesses. Many more stakeholders than shareholders are involved, for example employees, customers, patients, board members and others. Because of this, ESG is no longer just confined to being a public relations issue.

Compliance needs to be involved in managing these risks. An increase in rules and regulatory expectations underlines that the compliance function has a key role in responding to ESG challenges. Also, ESG is grounded in laws and regulations, but efforts go above and beyond what the law requires. And ESG is supported by standards and metrics.

Create value over the long term

More and more organizations have defined standards for ESG reporting. One of the most well-known and widely used frameworks is the Sustainability Accounting Standards Board (SASB). Sustainability suggests environmental responsibility but is nowadays often used interchangeably with ESG. SASB defines sustainability as the corporate activities that maintain or enhance the ability of the company to create value over the long term. Sustainability consists of the following aspects: the environment, social capital, human capital, business model, innovation, leadership, and governance.

SASB standards include disclosures, accounting, activity metrics, and technical protocols for accounting metrics. These standards have been developed for 77 industries.

2004 United Nations Global Compact Report

Now, let’s go back to the basics for a minute: the ESG context evaluates the sustainability efforts and compliance of a specific organization to determine how environmentally responsible, socially aware, and well-governed that company is. The concept of being socially responsible has existed since the second half of the 20th century. The term ESG was first introduced to a wider audience by a 2004 United Nations Global Compact Report that outlined general ESG implementation guidelines for companies, NGOs, consultants, and other business entities.

The UN report functions as a sustainability checklist:

Environmental compliance

• Impact on nature and environment
• Minimization and elimination of negative environmental impact
• Commitment to environmental protection laws and regulations
• Preparedness and response to climate change
• Greenhouse gas emissions
• Sustainable waste management
• Sustainable water and energy supply

Social compliance

• Commitment to social causes
• Impact of operations on society
• Proactive resolution of social issues within the organization and in society
• Gender equality
• Racial and ethnic equality
• Adherence to labor laws and regulations
• Fair employment practices, including workplace health and safety
• Social activism
• Stakeholder relations
• Huamns rights issues in the company’s supply chain and other key third parties

Governance compliance

• Fair internal executive practices, including compensation
• Board and committee structure and accountability
• Management follows the principles of sustainable corporate governance
• Transparent accounting practices
• Management of corruption and bribery risks
• Shareholder relations
• Tax code compliance and tax transparency
• Executive diversity

The statement of ESG priorities of the Financial Conduct Authority (FCA) published during COP26 in 2021 is a reminder of the regulatory focus on ESG and the attitude that regulators are expecting firms to take and to embed ESG considerations across their businesses.

Senior management has taken responsibility for ESG

Recently, global regulators, especially in Europe and the United States, published diverse principles and statements of intent with a widespread, multi-industry, and international focus on the environment. Also, more and more centers of excellence have been set up within organizations. In the last few years, senior management has taken responsibility for ESG more than before and has accepted accountability at board level. Now, leaders will need specific ESG reporting, allowing effective and informed challenge, oversight, and direction as required.

ESG will impact first lines within organizations, because it is seen as a business issue, leading to business opportunities such as new products, technologies, and innovation, including the demand for “green.” Existing offerings and clientele that risk the ESG principles will be addressed. Third lines will be responsible for auditing compliance with regulatory requirements and internal policies and procedures, including the integrity of data used to demonstrate compliance.

Putting data protection at the forefront

Using compliance processes to drive business improvements will require the collection and analysis of complete, reliable, and verifiable data for measuring the success of ESG initiatives. Companies will look at the types and amounts of data they collect, how they package it, and what they learn from it, all while putting data protection at the forefront. Regardless of the use of a cloud-supported data collection and analytics platform to aid ESG compliance, the fundamentals of the processes remain the same.

The company leadership will determine the materiality of ESG factors on financial performance. Then, a dedicated team that combines non-financial and financial reporting competencies will determine what gets measured, establish necessary benchmarks, and execute measurement. Lastly, subsequent reporting processes should satisfy the ESG criteria of priority investors and be presented in a manner that aligns with overlaps between voluntary disclosure frameworks, thus guaranteeing accessibility and usability by multiple stakeholders.

Compliance professionals are not always subject-matter experts on detailed underlying compliance requirements. Though, legal professionals are, and occasionally, so are the business units that deal with these risks. ESG professionals have technical expertise on ESG risks and compliance professionals have the mandatory skills and knowledge for applying the compliance framework to those ESG risks to ensure that corporate commitments are met in an honest way.

ESG compliance means focusing on:

• Environment
• Board accountability
• Management information
• Challenge and oversight
• Culture
• Remuneration as an encouragement to support clear accountability for ESG claims and promises
• Training and certification
• Financial crimes, for instance looking at the Financial Action Task Force and the Money Laundering From Environmental Crime Report, as environmental crimes may include certain industries or sectors where firms no longer wish to invest or lend.
• Green washing, delivering against the marketing and disclosure claims
• Disclosure, reporting and transparency, as many global regulators wish to achieve a consistent regulatory ESG tactics.
• Benchmarks and ESG ratings, enabling consistency of comparison across companies, investments, and portfolios
• Regulatory reporting, as data, metrics and management information will be key in ESG
• Diversity and inclusion (D&I)
• Metrics, reporting and monitoring, thus governance through a data-led approach
• Procurement and third-party risk management to review and assess suppliers in relation to social issues
• Communication and culture: How employees are being recognized, incentivized, and remunerated on a daily basis.
• Governance
• Product-oversight governance throughout the product life cycle of customer outcomes

Many aspects of ESG will become required by law after being a voluntary commitment to different sub business goals for such a long time. The direct financial and non-financial risks that companies are being exposed to are likely to continue increasing in the coming years. Meanwhile, looking at the collective, consumer protection will focus on deceptive marketing practices—mostly involving dubious or outright false claims about ESG-related achievements.

2022 is truly the year in which the urgency of ESG within organizations across the globe will become apparent and in which compliance professionals will consistently be involved in this domain. They will offer frameworks to apply to successfully manage the risks that are on the rise. Most likely, ESG will remain a separate function in most organizations, working closely and consulting with compliance. However, in some organizations, ESG and compliance will be part of the same team.

In short, ESG has matured, and it requires the involvement of the compliance team to be properly addressed. It’s critical that compliance and ethics professionals stay up to date on emerging issues and evolving ESG expectations. This information and more will be available to attendees of SCCE’s virtual 10^th Annual European Compliance & Ethics Institute on 22 and 23 March 2022 and SCCE’s ESG and Compliance Conference on 26 April https://www.corporatecompliance.org/conferences/virtual-conferences/2022-april-esg-and-compliance-conference.