Why ESG Will Never Be the Same After the Russian Invasion

Thomas Fox - Compliance Evangelist
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Thomas Fox - Compliance Evangelist

After the Russian invasion of Ukraine, the world of business will never be the same again. Deputy Attorney General (DAG) Lisa Monaco recently said that the world’s “geopolitical landscape is more challenging and complex than ever. The most prominent example is of course Russia’s invasion of Ukraine.” It is “nothing less than a fundamental challenge to international norms, sovereignty and the rule of law that underpins our society.” This is even more so in the current business climate.

Over this five-part series, I have considered how business will never again be the same and how a confluence of events has changed business forever. I have been joined in this exploration by Brandon Daniels, Chief Executive Officer (CEO) of Exiger. We have explored the irrevocable changes in Supply Chain, trade and economic sanctions, anti-corruption, cyber-security and environmental, social and governance (ESG). In our concluding Part 5, we consider why ESG will never be the same after the Russian invasion of Ukraine.

The pandemic led to an explosion of ESG awareness and forward movement. This was driven much more by the business world, from institutional investors, to shareholders, employees, and other stakeholders to financial institutions and even insurers, rather than through regulatory change. They are all now evaluating business prospects, targets and partners through an ESG lens. Many businesses have responded by upping their ESG game through sustainability officers, more robust ESG programs and similar efforts. However, these efforts were in many ways siloed within the three broad categories of ‘E’; ‘S’; and ‘G’. What the Russian invasion of Ukraine drove home was the need for a more holistic approach to corporate ESG.

ESG is now a key national security interest of democracy. The transparency mandated by ESG programs, through government required disclosure or private sector required disclosure also ties into the other areas of business change we have explored over this series. Obviously, the disruption in the supply chain of key minerals coming out of Russia, such as aluminum or fossil fuel, is an important issue but companies which tried to continue to use those resources faced a much greater risk and economic sanctions; that being reputational risk. Daniels remarks, “in terms of social issues, companies were forced to comply with sanctions, but then there were boycotts against companies that maintained relationships with the Russian autocracy. There were boycotts against companies that had ties to Russian oligarchs.”

It is this impact on reputational damage which has changed ESG going forward. Regulators can certainly levy and assess fines based upon violations of laws and regulations. For many businesses, however, this is simply seen as a cost of doing business, a below the line cost such as a corporate legal department of compliance function. However, hits to reputational damage are above the line costs meaning they eat directly into sales, revenue, and success. Moreover, your market cap and the valuation of your business are both based on revenue so any hit to your top line could significantly impact your organization in a very negative manner. If your organization is seen as supporting autocratic regimes who nakedly wage wars against women and children or your company purchases goods which were made by Uyghur slave labor; a very large swath of the consuming public will not want to purchase your products or even do business with you. The risk is simply too high.

This has led Daniels to reflect that consumers want to purchase and transact with purpose driven businesses. He said, “What is more purpose driven than supporting democracy and supporting the arrest, the fight against a brutal regime that is quite literally killing innocent women and children. This is not a question of risk management or risk appetite. This is a question of deciding whether or not you as a brand can stand for the ideals of freedom and the ideals that we have for an inclusive and fair and open and democratic world. When we talk about purpose driven, we have to remember that what people are demanding, is a company that aligns with their values, aligns with their ethics.”

All of these factors will change ESG forever and how companies’ approach ESG. Your organization must not only more fully integrate ESG into the overall business strategy, but your organization must integrate the ‘E’, the ‘S’ and the ‘G’ through a cohesive approach to all three all the way up to the Board level. Daniels noted that many companies were caught “flat-footed” by the Russian invasion of Ukraine. Looking across the three pillars of ESG, the Russian invasion of Ukraine forced companies to take ESG more seriously. Daniels said, “it codified and solidified in people’s minds, the need to manage ESG as a part of reputational brand value. You have to look at ESG proactively because trying to react to these situations causes so much turmoil.”

[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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