ESG and Compliance – Response and Enhancement

Thomas Fox

Compliance Evangelist

We conclude our five-part series on ESG and Compliance by looking at the final prong in the StoneTurn ESG Framework, that of Response and Enhancement. Many compliance professionals would see this as similar to continuous improvement and you would not be far off. However, it is even more important in ESG because of the dynamic nature of ESG. As Harvard Business School Professor George Serafeim stated in his Harvard Business Review (HBR) article, entitled Social Impact Efforts That Create Real Value, “It seems clear that companies will be under growing pressure to improve their performance on ESG dimensions in the future.” This pressure will continue as a company achieves one set of goals and then moves towards the next set of goals.

This is because, as we have seen from the compliance realm, an ESG program is not simply a ‘check-the-box’ exercise that Serafeim terms “window dressing”. It can include such activities as “improving ESG disclosures, releasing a sustainability report, or holding a sustainability-focused investor relations event.” Just like compliance, and properly seen, ESG “must look to more-fundamental drivers—particularly strategy—to achieve real results and be rewarded for them.” The key way to achieve real results and move them forward is through ESG program responses and enhancements. Once again, similar to compliance, “most companies have been treating ESG efforts like a cell phone case—something added for protection (in this case, protection of the firm’s reputation). Corporate leaders need to replace this mentality with an ambitious and differentiated ESG strategy if they want to see real financial dividends.”

As far back as 2012, Jennifer Hermes, writing in an Environment + Energy Leader article entitled Perspectives on Continuous Improvement in Corporate Sustainability, noted, “It starts with a mindset of continuous improvement. You can’t manage what you don’t measure. Developing defined, realistic benchmarks and strategies – whether to reduce carbon emissions, conserve water, reduce waste to landfills or other eco-conscious pursuits – rallies the workforce and prevents agenda tinkering at the top. Organizations that take consistent steps over time to reach specific sustainability goals often experience long-term operational savings. When everyone is aware of common goals, it also helps to accelerate a deeper understanding of how the complete supply chain contributes to overall environmental sustainability performance.” Hermes concluded, “When you grow a business sustainably, you don’t see a finish line. With every achievement, you learn new ways to continuously improve your environmental performance.” Once again, even if business leaders see compliance as simply reactive and legally based, every compliance professional knows that the only way to maintain an effective compliance program is through continuous improvement. (As does the Department of Justice (DOJ).)

In their article The Seven Deadly Sins of ESG Management Kosmas Papadopoulos and Rodolfo Araujo said, “Companies should avoid a static approach that may focus on adhering to minimum regulatory requirements.” This is because it can become a source of innovation and industry collaboration, through continuous improvement. In Part 3 of this series, I discussed that effective implementation of an ESG program requires regular monitoring using KPIs. This systematic approach to ESG using a compliance perspective is one of the key reasons compliance is the most well-suited corporate function to lead an organization’s ESG efforts.

Jim Deloach, writing in a piece entitled 12 Ways To Drive Better ESG Reporting, added additional reasons for continuous monitoring, all designed to improve your overall ESG program. If you focus solely on past performance and accomplishments, it will present a limited perspective and indeed may well hinder your overall ESG efforts. Deloach recommends “A balanced view that considers future goals and commitments aligned with the strategy presents a fuller picture for investors.” You should strive to align ESG reporting with the company’s financial reporting calendar so that all stakeholders can focus on both financial and ESG performance. “Aligning the two may become more important to facilitate a complete and timely evaluation of the company’s prospects by investors.” This is because the “underlying ESG-related activities drive investments, generate returns, create new sources of revenue, reduce operating costs and enable strategies.”

All of these authors make clear that responses and enhancement of an ESG program are directly aligned to the compliance requirement of continuous improvement. In the 2020 Update to the Evaluation of Corporate Compliance Programs, it stated, “One hallmark of an effective compliance program is its capacity to improve and evolve.” Substitute ESG for compliance and the connection becomes clear.

What should you do with this information generated by your ESG program? Have a strategic plan in place ready to implement your findings of continuous improvement, by using the following:

Review the goals of your ESG strategic plan. This requires that you arrange a time for to review the goals of the Strategic Plan, to determine how this goal in the Plan measures up to ESG implementation in your company.

Design an execution plan. The “Keep it Simple Sir” or KISS method is the best to move forward. This would suggest that for each ESG goal, there should be a simple and straight forward plan to ensure that the goal in question is being addressed.

Put accountabilities in place. In any plan of execution, there must be accountabilities attached to them. This requires mandating a reporting requirement on how the task assigned is being achieved.

Schedule the next review of the plan. There should be a regular review of the process. It allows any problems which may arise to be detected and corrected more quickly than if meetings are held at a less frequent basis.

I hope over this series you have seen not only how but why a Chief Compliance Officer (CCO) or corporate compliance function is the most well-suited in an organization to lead an ESG effort. Quite simply, the process for design, creation, implementation and running of an ESG program is virtually similar to that of a compliance program. The goals of ESG are very similar to the requirement of a CCO and compliance function to be the champions of institutional justice and institutional fairness in an organization. Good government is embedded into compliance as well. There is no conflict of interest in compliance leading this effort as there are multiple levels of oversight, monitoring and verification. Of course, both internal and external audit are there as well with their additional set of eyes.

If you have not done so please check out my podcast, The ESG Report on the Compliance Podcast Network where I explore an ESG issue from the compliance perspective each Monday.

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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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