“Person” of the Year: Environmental, Social and Governance

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The Volkov Law Group

One of my favorite New Year postings is under the title of “Person” of the Year. In the past, I have singled out the Chief Compliance Officers, Chief Ethics Officers, Prosecutors, and Whistleblowers.

For 2021, the choice is obvious – the most important trend is the rise of Environmental, Social and Governance (“ESG”) programs.  In second place, I would choose Supply Chain Management and Risks, given the importance of supply chain management in the post-pandemic world. 

In the end, ESG dominated the headlines and earned the annual recognition as the issue of the year.  While I continue to believe that ethics and compliance should not lead a corporate ESG program, ethics and compliance continues to benefit from corporate focus on ESG, and in particular, on the need to address the “G” of ESG or corporate governance.  In this respect, ethics and compliance has an opportunity to leverage ESG as a way to elevate the ethics and compliance function. 

Compliance officers have a unique skill that sits well within the ESG framework.  Compliance officers have line-of-sight across the organization and expertise in crafting internal compliance controls to mitigate risks.  Like compliance, ESG programs depend on line-of-sight across the organization, coordination with related functions, and design and oversight of policies and procedures to mitigate risks.

Given the similarity in skill sets, many professionals believe that compliance should include ESG responsibilities in their remit. My concerns is simple – ethics and compliance officers already have huge responsibilities for a company’s ethical culture, and compliance program. CCOs cannot take on more responsibilities. Companies face extraordinary risks from investor and stakeholder demands to implement robust ESG programs. SEC regulations surrounding ESG programs and disclosure requirements are soon to be implemented. As a result, a dedicated ESG officer and staff is a minimum requirement.

ESG, however, is a movement that reflects growing public and investor demands. Corporate leaders have to focus beyond quarterly financial reporting and respond to a broad menu of stakeholder demands. The landscape for corporate governance is undergoing a radical transformation – social and environmental issues compete with traditional financial, compliance and operational demands. While this reformation is occurring, corporate leaders are having to balance difficult issues while maintaining stakeholder support. At bottom, companies have to focus a keen eye on protection of its most valuable intangible asset — its reputation. This evolution is positive development and will benefit CCOs because of the important responsibility to protect a company’s reputation. 

Corporate compliance fits neatly in the ESG perspective. Investors and stakeholders are demanding corporate dedication to environmental sustainability, social issues and corporate governance. To increase access to capital, companies have to dedicate themselves to these new principles and provide robust disclosure of information falling in the ESG framework. 

Ethics and compliance programs are a critical component of effective corporate governance.  A company that ignores ethics and compliance will, by definition, falter in overall governance. Such deficiencies will inevitably threaten financial performance, increase the occurrence of employee misconduct, and raise the risk of a government enforcement action.

An ESG program has to include the CCO as a strategic partner.  Working together, ESG and CCOs can apply common solutions to design and implement policies, procedures and controls to accomplish an effective ESG and ethics and compliance program.  While the objectives may differ, the means to accomplish their respective goals include common techniques and approaches to build corporate-wide support for these two important programs.

ESG is here to stay. Corporate leaders need to expand their perspective and address important stakeholder issues, including ethics and compliance as part of the governance component. As a new and important objective, ESG is set to re-shape the corporate landscape.

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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