Compliance, Data Analytics and ESG

Thomas Fox

Compliance Evangelist

This week, I have been exploring the role for the compliance function in ESG and the role of a Chief Compliance Officer (CCO) in leading the corporate effort on ESG. Today, I want to focus on why the current job requirements of a CCO and corporate compliance function lend themselves to leadership in the ESG sphere. The short answer is data.

The Department of Justice (DOJ) has made clear that data and using data analytics are now mandatory for every compliance function and CCO. In the 2020 Update to the Evaluation of Corporate Compliance Programs, it posed the following set of questions, under the category, Data Resources and Access

Do compliance and control personnel have sufficient direct or indirect access to relevant sources of data to allow for timely and effective monitoring and/or testing of policies, controls, and transactions? Do any impediments exist that limit access to relevant sources of data and, if so, what is the company doing to address the impediments?

This mandate was a refocus by the DOJ on providing a CCO and corporate compliance function with the necessary data to move forward to an almost real time continuous monitoring leading to continuous improvement. Another term for this data analytics approach is ‘digitalization’. In a MIT Sloan Management Review article, entitled “The Convergence of Digitalization and Sustainability”, authors David Kiron and Gregory Unruh explored this in a manner which pointed to the intersection of compliance and ESG.

Digitalization and ESG are two of the most powerful market influences in the 2021 corporate landscape. Compliance moved to increased use of data during the pandemic when investigations, meetings, trainings and other traditional in-person events were all put on hold. These trends from 2020 are not only not going away but are increasing, in many ways exponentially.

Just as the use of data analytics will only increase, ESG is now front and center of corporate America. One only need look at two events from yesterday to see this momentous change. As reported in the New York Times DealBook, “Exxon Mobil suffered a stunning loss at its annual shareholder meeting yesterday, as a small new activist investor focused on climate change, Engine No. 1, won at least two seats on its 12-member board. To corporate America, the upset was a clear sign that company boards and leaders need to pay attention to environmental, social and governance issues (known as E.S.G.) — or suffer rebukes.” This shareholder vote clearly means investors want companies to pay attention to ESG issues.

In what may be an even more important development, according to the Wall Street Journal (WSJ), a  Dutch court ruled that Royal Dutch Shell “is partially responsible for climate change and must reduce its carbon emissions by 45% by 2030, compared with 2019 levels.” This legal case could be the harbinger of series of legal proceedings in the US. One only need think of Tobacco or Opioid Litigation to see that state Attorney Generals, private interest groups or private citizens could use similar legal theories to bring Big Energy in the US to make changes as well.

Yet when you consider the ESG-analytics convergence from the compliance perspective you see that there are “opportunities and challenges, within the organization and across organizational boundaries. Within, companies are using digital tools to map their environmental footprint and assess the impact of environmental shifts on their business. New digital technologies are improving sustainable innovation, even as they create new vulnerabilities like cybercrime and privacy loss.” Moreover, beyond simply the business enterprise perspective, the authors believe that the “digitalization-sustainability convergence is producing a digital transformation in three areas that influence market conditions: investor behavior, urbanization, and economic demand.”

The Securities and Exchange Commission (SEC) has made it clear that publicly traded companies need to make a priority of communications around ESG performance to investors. Using data analytics, a company can develop a robust story about how their ESG sustainability performance really does matters. The bottom line is that investors are not only paying attention to ESG performance, but they are also profiting from it. As the authors note, “evidence mounts that sustainability-related activities are material to the financial success of a company, investors increasingly care more about ESG performance than many executives believe.”

Finally, ESG is not simply an issue for the C-suite, but also for Boards of Directors. Just as Boards need to provide oversight of compliance programs, they must do so on ESG efforts. Here the authors pose several questions: “How should boards guide their companies over the long term, when major shareholders have different time horizons and use different sustainability metrics to assess financial performance? With investor interest in quantifying corporate ESG performance growing, what is or will be the response from corporate executives? Will companies develop their own sustainability ESG story — perhaps, by using data themselves in new ways — or will they let financial analysts tell one for them, entrusting their ESG destiny to others?”

These are all questions which data analytics can help answer. Moreover, the CCO and compliance function should have the tools to provide those answers in a documented fashion if an investor seeks answers or the regulators come knocking. As ESG moves forward to become even more important and even more ubiquitous, every CCO should take note and lead their organization’s effort.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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